Deck 14: Expectations: the Basic Tools

Question 1

Under which of the following assumptions would the nominal interest rate be equal to the real interest rate?

A)expected inflation is equal to the nominal interest rate.
B)expected inflation is equal to the real interest rate.
C)expected inflation is negative.
D)expected inflation is equal to zero.
E)none of the above

Answer 1

D

Question 2

An increase in the nominal interest rate,all else held constant,will always cause which of the following?

A)the real interest rate to decrease
B)the expected inflation rate to decrease
C)the demand for money to increase
D)all of the above
E)none of the above

Answer 2

E

Question 3

A consol bond promises to pay $1000 each year,forever,starting next year.If the nominal interest rate is 5%,the present discounted value of this consol is

A)$900.00.
B)$995.00.
C)$2,500.00.
D)$20,000.00.
E)$25,000.00.

Answer 3

D

Question 4

With a nominal interest rate of 10%,the present discounted value of $200 to be received in one year is

A)$90.91.
B)$165.29.
C)$181.82.
D)$190.00.
E)$220.00.

Question 5

If the nominal interest rate 8% and expected inflation 3%,the expected real interest rate in year t is approximately

A)2%.
B)3%.
C)5%.
D)8%.
E)11%.

Question 6

With a constant nominal interest rate equal to i,the present discounted value of $1.00 to be received 4 years from today is equal to

A)1+i.
B)i4.
C) (1+i)4.
D)1 / (1+i)4.
E)4(1+i).

Question 7

The present discounted value of a future payment becomes smaller when

A)the nominal interest rate decreases.
B)the payment is made sooner rather than later.
C)the payment itself decreases.
D)all of the above
E)none of the above

Question 8

Whenever the expected inflation rate is positive

A)the real interest rate is greater than the nominal interest rate.
B)the real interest rate is negative.
C)the real interest rate is positive.
D)the nominal interest rate must be equal to the real interest rate.
E)none of the above

Question 9

Suppose that the nominal interest rate increases while the expected inflation rate rises.Given this information,we know with certainty that the real interest rate

A)will not change.
B)will fall.
C)will fall,but only if the increase in the nominal rate is smaller than the increase in expected inflation.
D)will fall,but only if the increase in the nominal rate is greater than the increase in expected inflation.
E)none of the above

Question 10

The nominal interest rate is

A)the interest rate measured in terms of goods.
B)always less than the real interest rate.
C)equal to the real interest rate minus the rate of inflation.
D)the type of interest rate typically reported in the financial pages of newspapers.
E)equal to the expected rate of inflation.

Question 11

Data on real and nominal interest rates of one-year U.S.T-Bills show that,over the past twenty years,

A)the nominal rate has always been less than the real rate.
B)whenever the nominal rate rises,the real rate falls,and vice versa.
C)the nominal rate has varied,but the real rate has not.
D)the real rate has varied,but the nominal rate has not.
E)the real rate has always been less than the nominal rate.

Question 12

Which of the following best defines the real interest rate (r)?

A)the amount of goods we must give up next year in order to consume more goods today
B)the amount of dollars we must give up next year in order to consume more goods today
C)the amount of dollars we must give up next year in order to have more dollars today
D)the amount of dollars we must give up today in order to have more dollars next year
E)the amount of dollars we must give up today in order to consume more goods today

Question 13

For this question,assume that the interest rate is greater than 0.Given this information and the information about the payments provided below,rank the following three sequences of payments according to their present value "A" "B" "C"
2005 $190 $200 $210
2006 $200 $200 $200
2007 $210 $200 $190

A)A > B > C
B)A > C > B
C)C > B > A
D)C > A > B
E)B > A > C

Question 14

If the nominal interest rate is less than the real interest rate,we know that

A)both the nominal or real interest rate must be negative.
B)the nominal interest rate must be equal to expected inflation.
C)expected deflation must be occurring.
D)expected inflation must be positive.
E)expected inflation must be zero.

Question 15

With a nominal interest rate of 5% per year,the present discounted value of $100 to be received in 10 years is

A)$50.00.
B)$61.39.
C)$95.24.
D)$150.00.
E)$163.89.

Question 16

With a nominal interest rate of 10% per year,the present discounted value of $200 to be received in two years is

A)$82.64.
B)$90.91.
C)$165.29.
D)$181.82.
E)$220.00.

Question 17

If the nominal interest rate is 20% per year,how much money can an individual borrow today if she wants to repay $100 in one year?

A)$80.00
B)$83.33
C)$120.00
D)$78.00
E)$121.00

Question 18

Which of the following is true of the LM curve when the nominal interest rate (rather than the real interest rate)is on the vertical axis?

A)the LM curve becomes downward sloping.
B)a reduction in expected inflation will have no effect on the position of the LM curve.
C)a reduction in the expected inflation rate will make the LM curve shift up.
D)a reduction in the expected inflation rate will make the LM curve shift down.
E)none of the above

Question 19

Suppose the nominal interest rate is zero.In this situation,the present discounted value of a finite sequence of future payments is equal to which of the following?

A)zero
B)the sum of the all payments divided by the rate of inflation
C)the average value of each payment
D)the sum of all payments
E)the square of the sum of all payments

Question 20

If the expected inflation rate is negative,the expected real interest rate must be

A)negative.
B)less than the nominal interest rate.
C)equal to the nominal interest rate.
D)greater than the nominal interest rate.
E)none of the above

Question 21

Suppose the central bank engages in expansionary monetary policy that results in higher money growth.This higher money growth will cause which of the following in the short run?

A)lower real interest rates and lower nominal interest rates
B)lower real interest rates and higher nominal interest rates
C)higher real interest rates and higher nominal interest rates
D)higher real interest rates and lower nominal interest rates
E)no change in either nominal or real interest rates

Question 22

Suppose that the nominal interest rate and expected inflation both decrease by 2%.Given this information,we would expect which of the following to occur?

A)an increase in the real interest rate
B)a reduction in the real interest rate
C)a reduction in investment
D)an increase in money demand
E)both A and C

Question 23

For this question,assume that the interest rate is equal to 0.Given this information and the information about the payments provided below,rank the following three sequences of payments according to their present value "A" "B" "C"
2005 $190 $200 $210
2006 $200 $200 $200
2007 $210 $200 $190

A)A > B > C
B)A > C > B
C)C > B > A
D)B > A > C
E)none of the above

Question 24

In the medium run,higher money growth causes

A)lower real interest rates and lower nominal interest rates.
B)lower real interest rates and higher nominal interest rates.
C)higher real interest rates and higher nominal interest rates.
D)higher real interest rates and lower nominal interest rates.
E)none of the above

Question 25

Lower money growth tends to cause

A)higher nominal interest rates (i)in the medium run and no change in real interest rates (r)in the medium run.
B)no change in i in the medium run and an increase in r in the medium run.
C)an increase in i in the medium run and no change in r in the medium run.
D)a reduction in i in the medium run and no change in r in the medium run.

Question 26

When individuals make decisions about how much money and bonds to hold,which of the following variables affects those decisions?

A)the real interest rate only
B)the nominal interest rate only
C)the expected inflation rate only
D)either the real interest rate or the expected inflation rate
E)both the nominal and real interest rates

Question 27

Suppose output is growing at 4% and the nominal money stock is growing at 0%.Also assume that the economy has reached its medium run equilibrium.Given this information,we know with certainty that

A)inflation is less than 4%.
B)inflation is greater than 4%.
C)inflation is equal to 4%.
D)the real interest rate is equal to the nominal interest rate.
E)deflation occurs.

Question 28

In the IS-LM model,an increase in expected inflation will cause which of the following?

A)an increase in output
B)an increase in the nominal interest rate
C)a reduction in the real interest rate
D)all of the above
E)none of the above

Question 29

For this question,assume that expected inflation is zero.In this situation,we know that

A)the nominal and real interest rates are equal.
B)the nominal interest rate will exceed the real interest rate.
C)the real interest rate will exceed the nominal interest rate.
D)the real interest will be zero.
E)the real interest rate is negative.

Question 30

For this question,assume that expected inflation is equal to the nominal interest rate.In this situation,which of the following is correct?

A)the real interest rate is negative
B)the real interest rate is positive
C)the real interest rate is higher than the nominal interest rate
D)the real interest rate is zero

Question 31

Suppose the central bank engages in contractionary monetary policy that results in lower money growth.This lower money growth will cause which of the following in the short run?

A)lower real interest rates and lower nominal interest rates
B)lower real interest rates and higher nominal interest rates
C)higher real interest rates and higher nominal interest rates
D)higher real interest rates and lower nominal interest rates
E)no change in either nominal or real interest rates

Question 32

Let: (1)Pt be the price of one unit of a market basket of goods it be the one-year nominal interest rate.Suppose an individual borrows the equivalent of one unit of a composite commodity today.Given this information,which of the following expressions represents (i.e.,is equal to)the real interest rate (rt)?

A) (1 + it) (Pet+1) / (Pt)
B) (1 + πet+1) / (1 + it)
C){(1 + πet+1) / (1 + it)} - 1
D){(1 + it) (Pt) / (Pet+1)} - 1
E)none of the above

Question 33

In the medium run,lower money growth causes

A)lower real interest rates and lower nominal interest rates.
B)lower real interest rates and higher nominal interest rates.
C)higher real interest rates and higher nominal interest rates.
D)higher real interest rates and lower nominal interest rates.
E)none of the above

Question 34

Which of the following will NOT cause an increase in the present value of a sequence of payments?

A)a reduction in the current interest rate
B)a reduction in expected future interest rates
C)an increase in a future expected payment
D)none of the above

Question 35

Because expected inflation is typically positive,we know that

A)the nominal interest rate is generally less than the real interest rate.
B)the real interest rate is generally less than the nominal interest rate.
C)the nominal and real interest rates are generally equal.
D)the real interest rate is approximately equal to zero.

Question 36

Let: (1)Pt be the price of one unit of a market basket of goods it be the one-year nominal interest rate.Suppose an individual borrows the equivalent of one unit of a composite commodity today.Given this information,which of the following expressions represents (i.e.,is equal to)the amount of the composite commodity one must repay in one year?

A) (1 + it) (Pet+1) / (Pt)
B) (1 + πet+1) / (1 + it)
C){(1 + πet+1) / (1 + it)} - 1
D){(1 + it) (Pt) / (Pet+1)} - 1
E)none of the above

Question 37

When the IS curve is drawn with the nominal interest rate on the vertical axis,a reduction in the expected inflation rate will cause

A)the IS curve to shift rightward.
B)the IS curve to shift leftward.
C)the IS curve to become steeper.
D)the IS curve to become flatter.
E)no change in the IS curve.

Question 38

Because the nominal interest rate is always positive,the discount factor is always

A)negative.
B)greater than one.
C)zero.
D)less than one.

Question 39

For a given nominal interest rate,a reduction in expected inflation will cause

A)a reduction in the real interest rate.
B)an increase in the real interest rate.
C)an increase in investment.
D)an increase in money demand.

Question 40

Suppose the Federal Reserve pursues contractionary monetary policy resulting in a reduction in money growth.This reduction in money growth will result in which of the following?

A)lower nominal interest rates (i)in the medium run and no change in real interest rates (r)in the medium run
B)no change in (i)in the medium run and a reduction in r in the medium run
C)no change in (i)in the medium run and an increase in r in the medium run
D)an increase in (i)in the medium run and no change in r in the medium run

Question 41

Suppose the economy is initially operating at the natural level of output.Now,suppose the central bank increases the rate of nominal money growth by 3%.Given this information,we would expect that

A)the real interest rate will increase by less than 3% in the medium run.
B)the real interest rate will increase by exactly 3% in the medium run.
C)the real interest rate will fall by exactly 3% in the medium run.
D)none of the above

Question 42

With a nominal interest rate of 5%,the present discounted value of $100 to be received in one year is

A)$90.91.
B)$95.23.
C)$181.82.
D)$190.00.
E)$220.00.

Question 43

With a nominal interest rate of 5%,the present discounted value of $100 to be received in two year is

A)$90.00.
B)$90.70.
C)$95.23.
D)$110.00.

Question 44

Suppose the central bank pursues contractionary monetary policy.Such an action will cause

A)the natural real interest rate to rise.
B)the natural real interest rate to fall.
C)ambiguous effects on the natural real interest rate.
D)no effect on the natural real interest rate.

Question 45

In the IS-LM model,a reduction in expected inflation will cause which of the following?

A)a reduction in output
B)a reduction in the nominal interest rate
C)an increase in the real interest rate
D)all of the above
E)none of the above

Question 46

Suppose households decide to reduce consumption.This reduction in consumption will cause which of the following to occur?

A)the natural real interest rate to rise
B)the natural real interest rate to fall
C)ambiguous effects on the natural real interest rate
D)no effect on the natural real interest rate

Question 47

The Fisher effect summarizes the effects of

A)inflation on the nominal interest rate in the short run.
B)inflation on the real interest rate in the short run.
C)inflation on the nominal interest rate in the medium run.
D)inflation on the natural real interest rate in the short run.

Question 48

Suppose households decide to increase consumption.This increase in consumption will cause which of the following to occur?

A)the natural real interest rate to rise
B)the natural real interest rate to fall
C)ambiguous effects on the natural real interest rate
D)no effect on the natural real interest rate

Question 49

For a given nominal interest rate,an increase in expected inflation will cause

A)an increase in the real interest rate.
B)a reduction in the real interest rate.
C)a reduction in investment.
D)a reduction in money demand.

Question 50

Suppose the central bank pursues expansionary monetary policy.Such an action will cause

A)the natural real interest rate to rise.
B)the natural real interest rate to fall.
C)ambiguous effects on the natural real interest rate.
D)no effect on the natural real interest rate.

Question 51

The present discounted value of a future payment becomes larger when

A)the nominal interest rate increases.
B)the payment is made later.
C)the payment itself increases.
D)all of the above
E)none of the above

Question 52

Suppose the economy is initially operating at the natural level of output.Now,suppose the central bank reduces the rate of nominal money growth by 3%.Given this information,we would expect that

A)the real interest rate will fall by less than 3% in the medium run.
B)the real interest rate will fall by exactly 3% in the medium run.
C)the real interest rate will increase by exactly 3% in the medium run.
D)none of the above

Question 53

Suppose the economy is initially operating at the natural level of output.Now,suppose the central bank increases the rate of nominal money growth by 2%.Given this information,we would expect that

A)the nominal interest rate will rise by less than 2% in the medium run.
B)the nominal interest rate will rise by exactly 2% in the medium run.
C)the nominal interest rate will decrease by exactly 2% in the medium run.
D)the nominal interest rate will not change in the medium.
E)none of the above

Question 54

Suppose the economy is initially operating at the natural level of output.Now,suppose the central bank reduces the rate of nominal money growth by 2%.Given this information,we would expect that

A)the nominal interest rate will fall by less than 2% in the medium run.
B)the nominal interest rate will fall by exactly 2% in the medium run.
C)the nominal interest rate will increase by exactly 2% in the medium run.
D)the nominal interest rate will not change in the medium.
E)none of the above

Question 55

If the expected real interest rate 5% and expected inflation 3%,the nominal interest rate in year t is approximately

A)2%.
B)3%.
C)5%.
D)8%.
E)11%.

Question 56

Suppose there is an increase in government spending.Such a fiscal policy action will cause

A)the natural real interest rate to rise
B)the natural real interest rate to fall
C)ambiguous effects on the natural real interest rate
D)no effect on the natural real interest rate

Question 57

Suppose there is a reduction in government spending.Such a fiscal policy action will cause

A)the natural real interest rate to rise.
B)the natural real interest rate to fall.
C)ambiguous effects on the natural real interest rate.
D)no effect on the natural real interest rate.

Question 58

First,explain what the nominal interest rate represents.Second,explain what the real interest rate represents.

Question 59

In the medium run,which of the following expressions will represent the nominal interest rate?

A)rn - πe
B)rn
C)rn - gm
D)gY + gm
E)none of the above

Question 60

Suppose that the nominal interest rate and expected inflation both increase by 2%.Given this information,we would expect which of the following to occur?

A)a reduction in the real interest rate
B)an increase in the real interest rate
C)an increase in investment
D)a reduction in money demand
E)both A and C

Question 61

Explain whether it is possible for the nominal interest rate to increase while the real interest rate simultaneously decreases.

Question 62

Using the IS-LM model,graphically illustrate and explain what effect an increase in money growth will have on output,the nominal interest rate,and the real interest rate in the short run.

Question 63

Using the IS-LM model,graphically illustrate and explain what effect a reduction in money growth will have on output,the nominal interest rate,and the real interest rate in the short run.

Question 64

What are the determinants of the nominal interest rate in the medium run? Based on your answer,to what extent can monetary policy affect the nominal interest rate in the medium run? Briefly explain.And finally,to what extent can fiscal policy affect the nominal interest rate in the medium run? Briefly explain.

Question 65

Using the IS-LM model,graphically illustrate and explain what effect a reduction in expected inflation will have on the IS and LM curves in the short run.

Question 66

Explain what effect monetary policy will have on the real interest rate in the short run and in the medium run? Explain.

Question 67

First,discuss what is meant by the "natural real interest rate." Second,explain what effect each of the following will have on the natural real interest rate: (1)a reduction in government spending; (2)an increase in the nominal money supply.

Question 68

To reduce the nominal interest rate in the medium run,what type of policy should the central bank pursue? Explain.

Question 69

Explain whether it is possible for the nominal interest rate to decrease while the real interest rate simultaneously increases.

Question 70

To reduce the nominal interest rate in the short run,what type of policy should the central bank pursue? Explain.

Question 71

Using the IS-LM model,graphically illustrate and explain what effect an increase in expected inflation will have on the IS and LM curves in the short run.

Question 72

Explain what effect monetary policy will have on the nominal interest rate in the short run and in the medium run.

Question 73

What is the relationship among the nominal interest rate,the natural rate of interest,and money growth in the medium run? Explain.Based on your answer,what effect will a reduction in money growth have on the nominal interest rate and the natural real interest rate in the medium run? Explain.

Question 74

To raise the nominal interest rate in the short run,what type of policy should the central bank pursue? Explain.

Question 75

Explain what the Fisher effect / Fisher hypothesis represents.