Deck 6: Determining Market Interest Rates

Question 1

In the market for loanable funds the price of the funds exchanged is

A)the price of bonds.
B)the volume of bonds purchased.
C)the volume of bonds sold.
D)the interest rate.

Answer 1

the interest rate.

Question 2

A one-year discount bond with a face value of $1000 has an interest rate of 7%. What is its price?

A)$930
B)$934.58
C)$993
D)$1070

Answer 2

$934.58

Question 3

In the market for loanable funds, the buyer is considered to be

A)the lender.
B)the borrower.
C)the lender or the borrower depending upon the use to which the funds are put.
D)the lender or the borrower depending upon whether interest rates are rising or falling.

Answer 3

the borrower.

Question 4

A one-year discount bond with a face value of $1000 that is currently selling for $900 has an interest rate of

A)5.26%.
B)10%.
C)11.1%.
D)100%.

Question 5

The demand curve for loanable funds slopes down because

A)at lower bond prices more loanable funds will be supplied.
B)lower interest rates reduce the inflation rate.
C)an increase in the interest rate makes borrowers more willing and able to demand more funds.
D)a decrease in the interest rate makes borrowers more willing and able to demand more funds.

Question 6

The bond supply curve

A)shows the quantity of bonds lenders are willing to supply as bond prices change.
B)shows the quantity of bonds lenders are willing to supply as interest rates change.
C)shows the quantity of bonds borrowers are willing to supply as bond prices change.
D)is represented by a downward-sloping line when the price of bonds is on the vertical axis and the quantity of bonds supplied is on the vertical axis.

Question 7

Which of the following statements is correct?

A)The supply curve for loanable funds slopes up, whereas the supply curve for bonds slopes down.
B)The demand curve for loanable funds slopes up, whereas the demand curve for bonds slopes down.
C)The demand curve for loanable funds and the demand curve for bonds both slope up.
D)The supply curve for bonds and the supply curve for loanable funds both slope up.

Question 8

The formula for the yield to maturity, i, on a discount bond is

A)i = (Face value - Discount price)/Discount price.
B)i = (Discount price - Face value)/Discount price.
C)i = (Face value - Discount price)/Face value.
D)i = (Discount price - Face value)/Face value.

Question 9

How is the interest rate that prevails in the bond market determined?

A)By the interaction of stock prices and bond prices
B)By the decision of the president, in consultation with Congress
C)By demand for and supply of bonds
D)By the Board of Governors of the New York Stock Exchange

Question 10

The demand for bonds is

A)equivalent to the demand for loanable funds.
B)equivalent to the supply of loanable funds.
C)represented by an upward-sloping line when the price of bonds is on the vertical axis and the quantity of bonds demanded is on the horizontal axis.
D)represented by a downward-sloping line when the interest rate is on the vertical axis and the quantity of bonds demanded is on the horizontal axis.

Question 11

In the market for loanable funds, the seller is considered to be

A)the lender.
B)the borrower.
C)the lender or the borrower depending upon the use to which the funds are put.
D)the lender or the borrower depending upon whether interest rates are rising or falling.

Question 12

The bond demand curve slopes down because

A)interest rates decline as bond prices decline.
B)when bond prices are low, inflation is low.
C)the lender is willing and able to purchase more bonds when the price of the bond is low.
D)the borrower is willing and able to purchase more bonds when the price of the bond is low.

Question 13

A one-year discount bond with a face value of $10,000 that is currently selling for $9400 has an interest rate of

A)3.1%.
B)6%.
C)6.38%.
D)60%.

Question 14

The bond supply curve slopes up because

A)interest rates rise as bond prices rise.
B)when bond prices are high, inflation is high.
C)the lender is willing and able to offer more bonds when the price of the bond is low.
D)the borrower is willing and able to offer more bonds when the price of the bond is high.

Question 15

In the bond market, the seller is considered to be

A)the lender.
B)the borrower.
C)the lender or the borrower depending upon the use to which the funds are put.
D)the lender or the borrower depending upon whether interest rates are rising or falling.

Question 16

The supply curve of loanable funds slopes up because

A)at higher bond prices more loanable funds will be supplied.
B)higher interest rates reduce the inflation rate.
C)an increase in the interest rate makes lenders more willing and able to supply more funds.
D)a decrease in the interest rate makes lenders more willing and able to supply more funds.

Question 17

Japan's very low market interest rates in the early 2000s reflected

A)expected deflation.
B)an increasing budget deficit.
C)an increasing budget surplus.
D)an increase in corporate profits.

Question 18

A one-year discount bond with a face value of $1000 has an interest rate of 4%. What is its price?

A)$960
B)$961.54
C)$996
D)$1040

Question 19

In the bond market, the buyer is considered to be

A)the lender.
B)the borrower.
C)the lender or the borrower, depending upon the use to which the funds are put.
D)the lender or the borrower, depending upon whether interest rates are rising or falling.

Question 20

Loanable funds refers to

A)only those funds loaned from one bank to another.
B)only those funds loaned to banks by the Federal Reserve.
C)only those funds loaned by banks to private individuals.
D)all those funds changing hands between lenders and borrowers in the bond market.

Question 21

If the equilibrium price in the bond market for a one-year discount bond is $9400, then the equilibrium interest rate in the loanable funds market must be

A)4%.
B)6%.
C)6.4%.
D)9.4%.

Question 22

If there is an excess supply of bonds at a given price of bonds, then

A)the interest rate will fall.
B)the interest rate will rise.
C)the price of bonds will fall.
D)the interest rate may rise or the interest rate may fall depending upon the reasons for the excess demand for bonds.

Question 23

If the federal government were to guarantee a minimum rate of return on corporate bonds, the result would be a

A)decline in the equilibrium interest rate.
B)shift to the left in the supply curve for loanable funds.
C)shift to the left in the demand curve for loanable funds.
D)decline in bond prices.

Question 24

If there is an excess demand for bonds at a given price of bonds, then

A)the interest rate will fall.
B)the interest rate will rise.
C)the price of bonds will fall.
D)the interest rate may rise or the interest rate may fall depending upon the reasons for the excess demand for bonds.

Question 25

As wealth increases in the economy, savers are willing to

A)hold more cash relative to their holdings of bonds.
B)buy fewer bonds at any given price.
C)buy more bonds at any given price.
D)lend less at any given interest rate.

Question 26

A decrease in expected inflation

A)usually leads to falling nominal interest rates.
B)results in increased nominal capital gains on physical assets.
C)will shift the bond demand curve to the left.
D)will shift the supply curve for loanable funds to the left.

Question 27

Which of the following statements concerning the relation among consumption, saving, and income over the life cycle is INCORRECT?

A)Individuals who have recently entered the labor force tend to consume more than they earn.
B)Individuals who are in their peak earning years tend to have positive savings.
C)Individuals who are retired tend to finance part of their consumption by borrowing.
D)Most households attempt to even out the amount they consume over their life cycles.

Question 28

As wealth increases in the economy, we would expect to observe

A)bond prices and interest rates both rise.
B)bond prices and interest rates both fall.
C)bond prices rise and interest rates fall.
D)bond prices fall and interest rates rise.

Question 29

If the expected gains on stocks rise, while the expected returns on bonds do not change, then

A)the demand curve for bonds will shift to the left.
B)the supply curve for loanable funds will shift to the right.
C)the demand curve for loanable funds will shift to the left.
D)the equilibrium interest rate will fall.

Question 30

If the equilibrium price in the bond market for a one-year discount bond is $950, then the equilibrium interest rate in the loanable funds market must be

A)5%.
B)5.26%.
C)50%.
D)10%.

Question 31

If the equilibrium interest rate in the loanable funds market on a one-year discount bond is 10%, then the equilibrium price in the bond market must be

A)$9000.
B)$9090.91.
C)$10,000.
D)$11,000.

Question 32

The life-cycle model of consumption and saving focuses on

A)the tendency of young consumers to purchase fashionable or trendy goods.
B)the tendency of older people to be very reluctant to spend.
C)the pattern of using the financial system to match saving with consumption needs.
D)the reluctance of most Americans to save for retirement.

Question 33

If there is an excess supply of loanable funds at a given interest rate, then

A)the price of bonds will fall.
B)the price of bonds will rise.
C)the interest rate will rise.
D)the price of bonds may rise or fall depending upon the reasons for the excess supply of loanable funds.

Question 34

If there is an excess demand for loanable funds at a given interest rate, then

A)the price of bonds will fall.
B)the price of bonds will rise.
C)the interest rate will fall.
D)the price of bonds may rise or fall depending upon the reasons for the excess demand for loanable funds.

Question 35

Which age group typically has the highest savings rate?

A)Young people
B)Middle-aged people
C)Elderly people
D)Savings rates are approximately the same for all age groups.

Question 36

If the expected gains on stocks rise, while the expected returns on bonds do not change, then

A)the demand curve for bonds will shift to the right.
B)the supply curve for loanable funds will shift to the right.
C)the equilibrium interest rate will fall.
D)the equilibrium interest rate will rise.

Question 37

Which of the following would NOT cause the demand curve for bonds to shift?

A)A change in wealth
B)A change in the price of bonds
C)A change in the liquidity of bonds
D)A change in expected inflation

Question 38

If recessions in the United States were to increase in frequency, length, and severity, the likely result would be a(an)

A)shift to the right in the supply curve for loanable funds.
B)shift to the right in the demand curve for bonds.
C)rise in the equilibrium interest rate.
D)increase in the liquidity of corporate bonds.

Question 39

As wealth increases in the economy, savers are willing to

A)hold more cash relative to their holdings of bonds.
B)buy fewer bonds at any given price.
C)lend more at any given interest rate.
D)lend less at any given interest rate.

Question 40

If the equilibrium interest rate in the loanable funds market on a one-year discount bond is 8%, then the equilibrium price in the bond market must be

A)$9200.
B)$9259.26.
C)$9325.15.
D)$10,000.

Question 41

Suppose that Congress passes a law that prohibits mutual funds from holding corporate bonds. The likely result would be a(an)

A)shift to the right in the demand curve for bonds.
B)shift to the left in the supply curve for loanable funds.
C)increase in the equilibrium interest rate.
D)decrease in the equilibrium interest rate.

Question 42

During the last several decades, the government sector

A)has not spent more than it collected in taxes.
B)has run large deficits.
C)has run large surpluses.
D)has balanced its budget every year.

Question 43

An increase in the corporate profits tax is likely to cause

A)the equilibrium interest rate to rise and the equilibrium price of bonds to fall.
B)the equilibrium interest rate to fall and the equilibrium price of bonds to rise.
C)the equilibrium interest rate and the equilibrium price of bonds both rise.
D)the equilibrium interest rate and the equilibrium price of bonds both fall.

Question 44

From 1970 through 1997, the domestic government sector was

A)a net borrower.
B)a net lender.
C)neither a borrower nor a lender.
D)a major factor in keeping real interest rates low.

Question 45

The Federal Reserve issues a report indicating that future inflation will be higher than had previously seemed likely. As a result

A)the supply curve for bonds shifts to the right.
B)the demand curve for loanable funds shifts to the left.
C)the equilibrium interest rate falls.
D)the equilibrium price of bonds rises.

Question 46

The demand curve for bonds would be shifted to the left by

A)an increase in expected returns on other assets.
B)a decrease in the information costs of bonds relative to other assets.
C)a decrease in expected inflation.
D)an increase in the liquidity of bonds relative to other assets.

Question 47

Suppose that Congress passes an investment tax credit. The likely result will be

A)the supply curve for bonds will shift to the right.
B)the demand curve for loanable funds will shift to the left.
C)the supply curve for loanable funds will shift to the left.
D)the equilibrium interest rate will fall.

Question 48

In an effort to increase government revenue, Congress and the president decide to increase the corporate profits tax. The likely result will be

A)the supply curve for bonds shifts to the right.
B)the demand curve for loanable funds shifts to the left.
C)the equilibrium interest rate rises.
D)the equilibrium price of bonds falls.

Question 49

If the federal government decreases its purchases and doesn't decrease taxes, the bond supply shifts to the

A)left and the equilibrium interest rate rises.
B)left and the equilibrium interest rate falls.
C)right and the equilibrium interest rate rises.
D)right and the equilibrium interest rate falls.

Question 50

Businesses typically issue bonds to finance

A)their inventories.
B)payments to their workers.
C)spending on new plant and equipment.
D)dividend payments to their stockholders.

Question 51

Investors value liquidity in an asset because

A)liquid assets tend to have high rates of return.
B)liquid assets incur lower selling costs.
C)liquid assets incur lower tax liabilities.
D)whereas liquid assets have high information costs, their low risk offsets this.

Question 52

The demand curve for bonds would be reduced by

A)a decrease in expected returns on other assets.
B)an increase in the information costs of bonds relative to other assets.
C)an increase in wealth.
D)an increase in the liquidity of bonds relative to other assets.

Question 53

During a period of economic expansion, when expected profitability is high,

A)the supply curve for bonds shifts to the left.
B)the demand curve for loanable funds shifts to the right.
C)the equilibrium interest rate falls.
D)the equilibrium price of bonds rises.

Question 54

Suppose that a new bond rating service is established that specializes in rating municipal bonds that had not previously been rated. The likely result would be

A)a shift to the right in the demand curve for bonds.
B)a shift to the left in the supply curve for loanable funds.
C)an increase in the equilibrium interest rate.
D)a decrease in the equilibrium interest rate.

Question 55

If the government were to simultaneously cut the personal income tax and the corporate profits tax, the equilibrium interest rate

A)would fall.
B)would rise.
C)would be unaffected.
D)might either rise or fall.

Question 56

If the government increases taxes while holding expenditures constant,

A)the bond supply curve will shift to the left and the equilibrium interest rate will fall.
B)the bond supply curve will shift to the right and the real interest rate will fall.
C)government borrowing will be increased.
D)the government's deficit will increase.

Question 57

The demand curve for bonds would be shifted to the left by an

A)increase in wealth.
B)increase in expected returns on bonds.
C)increase in expected inflation.
D)increase in the liquidity of bonds relative to other assets.

Question 58

If a government's income tax receipts exceed its expenditures, the government is running a

A)surplus and is a net borrower of funds.
B)surplus and is a net saver of funds.
C)deficit and is a net borrower of funds.
D)deficit and is a net saver of funds.

Question 59

The supply curve for loanable funds would decline due to

A)an increase in wealth.
B)an increase in the expected return on bonds.
C)an increase in expected inflation.
D)a decrease in the riskiness of bonds relative to other assets.

Question 60

The supply curve for loanable funds would increase due to a(n)

A)increase in wealth.
B)increase in expected inflation.
C)decrease in the liquidity of bonds relative to other assets.
D)increase in the information costs of bonds relative to other assets.

Question 61

Most economists credit the decline in short-term nominal rates over the 1980s and early 1990s to

A)lower tax rates.
B)decreased spending by the federal government.
C)rising prices on the New York Stock Exchange.
D)the Federal Reserve's fight against inflation.

Question 62

The supply curve for bonds would be shifted to the right by

A)a decrease in expected profitability.
B)a decrease in the corporate tax on profits.
C)a decrease in tax subsidies for investment.
D)a decrease in government borrowing.

Question 63

During wars,

A)the supply curve for bonds shifts to the right, lowering the equilibrium interest rate.
B)the demand curve for bonds shifts to the left, lowering the equilibrium interest rate.
C)the demand curve for loanable funds shifts to the right, raising the equilibrium interest rate.
D)the supply curve for loanable funds shifts to the right, lowering the equilibrium interest rate.

Question 64

If households increase their saving at the same time that the government increases its deficit,

A)the demand and supply curves for bonds will be unaffected.
B)the demand curve for bonds will shift to the left.
C)the supply curve for bonds will shift to the right.
D)the equilibrium interest rate will definitely rise.

Question 65

During an economic recession,

A)the bond demand and supply curves both shift to the left and the equilibrium interest rate usually falls.
B)the bond demand and supply curves both shift to the right and the equilibrium interest rate usually rises.
C)the bond demand curve shifts to the right, the bond supply curve shifts to the left, and the equilibrium interest rate usually falls.
D)the bond demand curve shifts to the left, the bond supply curve shifts to the right, and the equilibrium interest rate usually rises.

Question 66

In a large open economy,

A)domestic lending and borrowing decisions have no impact on the world real interest rate.
B)an increase in the domestic supply of loanable funds would lower the world real interest rate.
C)the domestic equilibrium real interest rate is determined independently of foreign borrowing and lending.
D)an increase in the domestic demand for loanable funds would lower the world real interest rate.

Question 67

The supply curve for bonds would be shifted to the left by

A)a decrease in government borrowing.
B)a decrease in the corporate tax on profits.
C)an increase in tax subsidies for investment.
D)an increase in expected inflation.

Question 68

The equilibrium real interest rate in Belgium will be

A)generally above the world real interest rate.
B)generally below the world real interest rate.
C)equal to the world real interest rate.
D)determined by the equilibrium between desired domestic saving and desired domestic investment.

Question 69

The world real interest rate is

A)set annually by a special commission at the United Nations.
B)set annually by a special commission at the International Monetary Fund.
C)determined in the international capital market.
D)determined daily on the New York Stock Exchange.

Question 70

During an economic recession,

A)the demand and supply curves for loanable funds both shift to the right and the equilibrium interest rate usually rises.
B)the demand and supply curves for loanable funds both shift to the left and the equilibrium interest rate usually falls.
C)the demand curve for loanable funds shifts to the right, the supply curve for loanable funds shifts to the left, and the equilibrium interest rate usually falls.
D)the demand curve for loanable funds shifts to the left, the supply curve for loanable funds shifts to the right, and the equilibrium interest rate usually rises.

Question 71

In an open economy, desired domestic lending

A)must equal desired domestic borrowing.
B)must equal desired domestic borrowing plus the amount of international lending.
C)is always greater than desired domestic borrowing.
D)is always less than desired domestic borrowing.

Question 72

Studies by economists suggest that

A)households do not increase their saving as the government's dissaving increases.
B)households increase their saving, but not by the full amount of an increase in government dissaving.
C)households also increase their dissaving when the government increases its dissaving.
D)households also increase their saving when the government increases its saving.

Question 73

An open economy is one that

A)has a large government sector.
B)lends and borrows in the international capital market.
C)produces mainly agricultural goods.
D)produces mainly manufactured goods.

Question 74

The increase in German investment in what was formerly East Germany resulted in

A)a decline in the world real interest rate.
B)a shift to the right in the German supply of loanable funds curve.
C)an increase in the real interest rate in the United States.
D)a shift to the left in the German demand for loanable funds curve.

Question 75

Suppose that a small economy that had previously been closed becomes open. If its real interest rate had previously been below the world real interest rate, we would expect that

A)the country's real interest rate would remain below the world level.
B)the country would become a net lender abroad.
C)the country would become a new borrower abroad.
D)the amount of loanable funds supplied in the country would decline.

Question 76

A small open economy

A)is unable to affect the world real interest rate by its borrowing and lending decisions.
B)will always be a net borrower from abroad.
C)will always be a net lender abroad.
D)is almost never able to borrow abroad.

Question 77

During 2000, the government repurchased $30 billion in U.S. Treasury bonds outstanding. This was the first time this had been done since the administration of Herbert Hoover in the early 1930s. Analyze the impact of this repurchase on the bond market.

Question 78

In the 1980s, 1990s, and early 2000s, the United States

A)was essentially a closed economy.
B)was generally a net borrower of foreign funds.
C)was generally a net lender abroad.
D)experienced a net outflow of savings.

Question 79

A closed economy is one that

A)has no government sector.
B)neither borrows from nor lends to foreign countries.
C)produces mainly agricultural goods.
D)produces mainly manufactured goods.

Question 80

As a result of higher expected inflation,

A)the demand and supply curves for loanable funds both shift to the right and the equilibrium interest rate usually rises.
B)the demand and supply curves for loanable funds both shift to the left and the equilibrium interest rate usually falls.
C)the demand curve for loanable funds shifts to the right, the supply curve for loanable funds shifts to the left, and the equilibrium interest rate usually rises.
D)the demand curve for loanable funds shifts to the left, the supply curve for loanable funds shifts to the right, and the equilibrium interest rate usually rises.