Exam 5: Understanding Interest Rates, Savings, and the Wealth Effect

Expansion of the money supply by the central bank should lower interest rates provided the demand for money does not fall; if the demand for money does decline, interest rates will rise.

The volume of net investment in the economy is closely linked to fluctuations in the nation's output of goods and services, employment and prices.

According to the liquidity preference theory of interest, the interest rate is the "price" that must be paid to induce money holders to surrender a perfectly liquid asset.

Rational expectations theorists argue that rate hedging is preferable to rate forecasting because guessing the public's expectations is too difficult.

The equilibrium rate of interest as determined in the loanable funds theory of interest will fall if:

The foreign supply of loanable funds to the U.S. credit markets is positively related to U.S.-foreign interest rate differentials.

When Savings continue to grow while interest rates decline is referred to as

The pure or risk-free rate of interest is a component of all interest rates in the economy. The closest approximation of this in the real world is the yield to maturity on U.S. Treasury bills.

According to the liquidity preference theory

In the liquidity preference theory the nation's money supply is assumed to be interest inelastic.

The role of the interest rate in influencing business savings is in affecting what proportion of needed funds will be raised internally and what proportion externally.

According to the Rational Expectations Theory, if the market expects more government borrowing, rates will decline.

A rise in the overall level of interest rates results in a greater volume of saving generated in the economy. The foregoing sentence describes the: