Question 1

If the ex-post real interest rate is 5 percent and actual inflation rate is 2 percent, the nominal interest rate is

Accepted Answer

A) 7 percent. 
B) 3 percent. 
C) 2.5 percent. 
D) 2 percent. 
A) 7 percent. 
B) 3 percent. 
C) 2.5 percent. 
D) 2 percent.

Question 2

Suppose that a change in the expected inflation rate leads supply and demand to adjust so that the after-tax expected real interest rate is unchanged at 2.0 percent.The tax rate is 30 percent.Initially, the expected inflation rate is 3.0 percent.If the expected inflation rate falls from 6 percent to 0 percent, the expected real interest rate

Accepted Answer

A) rises by 1.25 percent. 
B) rises by 2.5 percent. 
C) falls by 2.5 percent. 
D) falls by 1.25 percent. 
A) rises by 1.25 percent. 
B) rises by 2.5 percent. 
C) falls by 2.5 percent. 
D) falls by 1.25 percent.

Question 3

Mary bought a bond ​a debt security for $2,500 with a nominal interest rate of 5 percent.If the inflation rate is 4 percent and Mary must pay 30 percent of her income in taxes, her after-tax nominal interest income is .

Accepted Answer

A) ​$87.50 
B) ​$22.50 
C) ​$37.50 
D) ​$48.50 
A) ​$87.50 
B) ​$22.50 
C) ​$37.50 
D) ​$48.50

Question 4

The nominal interest rate adjusted for actual inflation is the

Accepted Answer

A) expected real interest rate. 
B) realized real interest rate. 
C) after-tax real interest rate. 
D) yield curve. 
A) expected real interest rate. 
B) realized real interest rate. 
C) after-tax real interest rate. 
D) yield curve.

Question 5

Which of the following will NOT play a role in eliminating the shortcoming of the taxation system, particularly the fact that the tax system taxes nominal return rather than real return?

Accepted Answer

A) Eliminating taxation of interest 
B) Introducing inflation-indexed bonds 
C) Taxing only real interest income, not nominal interest income 
D) Reducing inflation to zero 
A) Eliminating taxation of interest 
B) Introducing inflation-indexed bonds 
C) Taxing only real interest income, not nominal interest income 
D) Reducing inflation to zero

Question 6

Another name for the realized real interest rate is the

Accepted Answer

A) securitized real interest rate. 
B) expected real interest rate. 
C) ex-post real interest rate. 
D) ex-ante real interest rate. 
A) securitized real interest rate. 
B) expected real interest rate. 
C) ex-post real interest rate. 
D) ex-ante real interest rate.

Question 7

Investors can lock in a real interest rate and thus avoid most of the risk of unexpected inflation by buying

Accepted Answer

A) corporate bonds. 
B) inflation-indexed securities. 
C) stock. 
D) mortgage-backed securities. 
A) corporate bonds. 
B) inflation-indexed securities. 
C) stock. 
D) mortgage-backed securities.

Question 8

Suppose you buy an inflation-indexed bond that will adjust with inflation and thus pay you $2,500 in real (inflation- adjusted) terms each year for the next five years, plus your real principal of $100,000 at the end of the fifth year.The nominal interest rate is 4 percent and the expected inflation rate is 1 percent.What is the present value of the bond? Show your work.

Accepted Answer

This is a present-value problem in which

Question 9

Suppose that a change in the expected inflation rate leads supply and demand to adjust so that the after-tax expected real interest rate is unchanged at 2.0 percent.The tax rate is 30 percent.Initially, the expected inflation rate is 3.0 percent.If the expected inflation rate rises from 3 percent to 6 percent, the expected real interest rate

Accepted Answer

A) rises by 0.75 percent. 
B) rises by 1.25 percent. 
C) falls by 1.25 percent. 
D) falls by 0.75 percent. 
A) rises by 0.75 percent. 
B) rises by 1.25 percent. 
C) falls by 1.25 percent. 
D) falls by 0.75 percent.

Question 10

The nominal interest rate adjusted for expected inflation is the

Accepted Answer

A) expected real interest rate. 
B) realized real interest rate. 
C) after-tax real interest rate. 
D) yield curve. 
A) expected real interest rate. 
B) realized real interest rate. 
C) after-tax real interest rate. 
D) yield curve.

Question 11

If the expected inflation rate is 4 percent, the nominal interest rate is 6 percent, and the actual inflation rate turns out  to be 2 percent, then the realized real interest rate is _____than the expected real interest rate and borrowers______relative to lenders.

Accepted Answer

A) less; gain 
B) less; lose 
C) greater; gain 
D) greater; lose 
A) less; gain 
B) less; lose 
C) greater; gain 
D) greater; lose

Question 12

What is the real present value of $5,202 to be received after two years if the expected rate of inflation over the next two years is 2 percent ?

Accepted Answer

A) ​$5,000 
B) $4,105 
C) ​$4,807 
D) ​$5,100 
A) ​$5,000 
B) $4,105 
C) ​$4,807 
D) ​$5,100

Question 13

If the expected inflation rate was 4 percent and the actual inflation rate was 6 percent, then

Accepted Answer

A) borrowers gained in real terms at the expense of lenders. 
B) lenders gained in real terms at the expense of borrowers. 
C) borrowers and lenders were not affected. 
D) the government lost because it collected less in taxes. 
A) borrowers gained in real terms at the expense of lenders. 
B) lenders gained in real terms at the expense of borrowers. 
C) borrowers and lenders were not affected. 
D) the government lost because it collected less in taxes.

Question 14

Realized real interest rates in the United States were often negative in the early

Accepted Answer

A) 1960s. 
B) 1970s. 
C) 1980s. 
D) 1990s. 
A) 1960s. 
B) 1970s. 
C) 1980s. 
D) 1990s.

Question 15

For every dollar's worth of goods and services bought at an earlier date, the amount of money it would take now to buy the same amount of goods and services after N years of inflation at rate p is called the inflation______ discount factor.

Accepted Answer

A) future 
B) realized 
C) expected 
D) past 
A) future 
B) realized 
C) expected 
D) past

Question 16

The amount of interest paid on a debt security in dollar terms as a percent of the principal is referred to as the

Accepted Answer

A) expected real interest rate. 
B) realized real interest rate. 
C) after-tax real interest rate. 
D) nominal interest rate. 
A) expected real interest rate. 
B) realized real interest rate. 
C) after-tax real interest rate. 
D) nominal interest rate.

Question 17

Explain why inflation risk is a problem for investors.

Accepted Answer

Inflation risk increases the r

Question 18

If you expect inflation to be 2 percent next year and you buy a one-year bond paying 5 percent interest, what is your after-tax expected real interest income if the price of the bond is $200 and your tax rate is 40 percent?

Accepted Answer

A) $0.20 
B) $20 
C) $10 
D) $2 
A) $0.20 
B) $20 
C) $10 
D) $2

Question 19

According to the Fisher hypothesis, an increase in the expected inflation rate should lead to____ in the nominal Interest rate and ____ in the expected real interest rate.

Accepted Answer

A) an increase; a decrease 
B) an increase; no change 
C) an increase; an increase 
D) a decrease; a decrease 
A) an increase; a decrease 
B) an increase; no change 
C) an increase; an increase 
D) a decrease; a decrease

Question 20

Realized real interest rates in the United States were the highest in the

Accepted Answer

A) 1960s. 
B) 1970s. 
C) 1980s. 
D) 1990s. 
A) 1960s. 
B) 1970s. 
C) 1980s. 
D) 1990s.

If the ex-post real interest rate is 5 percent and actual inflation rate is 2 percent, the nominal interest rate is

Mary bought a bond a debt security for $2,500 with a nominal interest rate of 5 percent.If the inflation rate is 4 percent and Mary must pay 30 percent of her income in taxes, her after-tax nominal interest income is .

The nominal interest rate adjusted for actual inflation is the

Which of the following will NOT play a role in eliminating the shortcoming of the taxation system, particularly the fact that the tax system taxes nominal return rather than real return?

Another name for the realized real interest rate is the

Investors can lock in a real interest rate and thus avoid most of the risk of unexpected inflation by buying

The nominal interest rate adjusted for expected inflation is the

If the expected inflation rate is 4 percent, the nominal interest rate is 6 percent, and the actual inflation rate turns out to be 2 percent, then the realized real interest rate is _than the expected real interest rate and borrowers__relative to lenders.

What is the real present value of $5,202 to be received after two years if the expected rate of inflation over the next two years is 2 percent ?

If the expected inflation rate was 4 percent and the actual inflation rate was 6 percent, then

Realized real interest rates in the United States were often negative in the early

For every dollar's worth of goods and services bought at an earlier date, the amount of money it would take now to buy the same amount of goods and services after N years of inflation at rate p is called the inflation______ discount factor.

The amount of interest paid on a debt security in dollar terms as a percent of the principal is referred to as the

Explain why inflation risk is a problem for investors.

If you expect inflation to be 2 percent next year and you buy a one-year bond paying 5 percent interest, what is your after-tax expected real interest income if the price of the bond is $200 and your tax rate is 40 percent?

According to the Fisher hypothesis, an increase in the expected inflation rate should lead to in the nominal Interest rate and in the expected real interest rate.

Realized real interest rates in the United States were the highest in the

Money and the Financial System

The Financial System and the Economy

Money and Payments

Present Value

The Structure of Interest Rates

Stocks and Other Assets

How Banks Work

Governments Role in Banking

Economics Growth and Business Cycles

Modeling Money

The Aggregate-Demandaggregate-Supply Model

Modern Macroeconomic Models

Economic Interdependence

The Federal Reserve System

Monetary Control

Monetary Policy: Goals and Tradeoffs

Rules for Monetary Policy

Filters

Exam 6: Real Interest Rates

If the ex-post real interest rate is 5 percent and actual inflation rate is 2 percent, the nominal interest rate is

Mary bought a bond ​a debt security for $2,500 with a nominal interest rate of 5 percent.If the inflation rate is 4 percent and Mary must pay 30 percent of her income in taxes, her after-tax nominal interest income is .

The nominal interest rate adjusted for actual inflation is the

Which of the following will NOT play a role in eliminating the shortcoming of the taxation system, particularly the fact that the tax system taxes nominal return rather than real return?

Another name for the realized real interest rate is the

Investors can lock in a real interest rate and thus avoid most of the risk of unexpected inflation by buying

The nominal interest rate adjusted for expected inflation is the

If the expected inflation rate is 4 percent, the nominal interest rate is 6 percent, and the actual inflation rate turns out to be 2 percent, then the realized real interest rate is _____than the expected real interest rate and borrowers______relative to lenders.

What is the real present value of $5,202 to be received after two years if the expected rate of inflation over the next two years is 2 percent ?

If the expected inflation rate was 4 percent and the actual inflation rate was 6 percent, then

Realized real interest rates in the United States were often negative in the early

For every dollar's worth of goods and services bought at an earlier date, the amount of money it would take now to buy the same amount of goods and services after N years of inflation at rate p is called the inflation______ discount factor.

The amount of interest paid on a debt security in dollar terms as a percent of the principal is referred to as the

Explain why inflation risk is a problem for investors.

If you expect inflation to be 2 percent next year and you buy a one-year bond paying 5 percent interest, what is your after-tax expected real interest income if the price of the bond is $200 and your tax rate is 40 percent?

According to the Fisher hypothesis, an increase in the expected inflation rate should lead to____ in the nominal Interest rate and ____ in the expected real interest rate.

Realized real interest rates in the United States were the highest in the

Money and the Financial System

The Financial System and the Economy

Money and Payments

Present Value

The Structure of Interest Rates

Stocks and Other Assets

How Banks Work

Governments Role in Banking

Economics Growth and Business Cycles

Modeling Money

The Aggregate-Demandaggregate-Supply Model

Modern Macroeconomic Models

Economic Interdependence

The Federal Reserve System

Monetary Control

Monetary Policy: Goals and Tradeoffs

Rules for Monetary Policy

Filters

Mary bought a bond a debt security for $2,500 with a nominal interest rate of 5 percent.If the inflation rate is 4 percent and Mary must pay 30 percent of her income in taxes, her after-tax nominal interest income is .

If the expected inflation rate is 4 percent, the nominal interest rate is 6 percent, and the actual inflation rate turns out to be 2 percent, then the realized real interest rate is _than the expected real interest rate and borrowers__relative to lenders.

According to the Fisher hypothesis, an increase in the expected inflation rate should lead to in the nominal Interest rate and in the expected real interest rate.