Question 1

In the loanable funds theory of interest consumer demand for credit is assumed to be relatively elastic with respect to changes in the rate of interest.

Accepted Answer

A) True 
 B)False

Question 2

The speculative demand for money states that investors speculate when interest rates are high.

Accepted Answer

A) True 
 B)False

Question 3

What, then is the rational expectations theory of interest rates? How does it differ from earlier interest-rate determination theories, such as The Classical, Liquidity Preference and Loanable Funds ideas?

Accepted Answer

The answer of What, then is the rational expectations theory...

Question 4

Possible explanations for the "convergence" of market interest rates in Western Europe at the inception of the European Monetary Union (EMU) include:

Accepted Answer

A)  A perceived decline in currency risk as the Euro replaced many traditional currencies 
B)  The occurrence of the long-awaited turnaround at Euro-Disney 
C)  A predicted inflation decline due to the new European Central Bank 
D)  All of the above 
E)  Choices A and C only

Question 5

The theory which argues that the risk-free interest rate is determined by the interaction of the supply of savings (coming mainly from households) and the demand for investment capital (principally from business) is known as the:

Accepted Answer

A)  Classical Theory of Interest Rates 
B)  Liquidity Preference Theory of Interest Rates 
C)  Loanable Funds Theory of Interest 
D)  Efficient Markets Theory 
E)  None of the above

Question 6

According to the Rational Expectations Theory:

Accepted Answer

A)  Information costs are large relative to the value of securities traded 
B)  Securities prices reflect all available information 
C)  Interest rate changes are related to anticipated information 
D)  Interest rate changes follow predictable patterns 
E)  Monetary policy will always be effective

Question 7

Ms. Jones purchased a 20-year Treasury bond bearing a 12% coupon rate. She purchased the bond at par ($1,000). If rates fall to 9%, what will be the new price of the bond?

Accepted Answer

A)  $1,333 
B)  $1,500 
C)  $750 
D)  $900 
E)  There will be no change in the price of the bond

Question 8

What are the principal limitations of the Loanable Funds Theory of Interest?

Accepted Answer

The answer of What are the principal limitations of the...

Question 9

In the rational expectations theory concerning interest rates business and household decision-makers are assumed to be:

Accepted Answer

A)  Risk neutral 
B)  Rational agents 
C)  Speculators 
D)  Risk minimizers 
E)  None of the above

Question 10

Households are savers in the economy, while businesses are not.

Accepted Answer

A) True 
 B)False

Question 11

At low rates of interest less money is normally demanded in the economy because most investors feel bond prices must eventually rise.

Accepted Answer

A) True 
 B)False

Question 12

Foreign demand for loanable funds is relatively insensitive to interest-rate differentials between the U.S. and the rest of the world.

Accepted Answer

A) True 
 B)False

Question 13

The Classical theory of interest assumes that interest rates are the principal determinant of the quantity of savings and that the demand for borrowed funds comes primarily from consumers and government.

Accepted Answer

A) True 
 B)False

Question 14

According to your text, the principal determinant of the volume of saving by households (i.e., individuals and families) is:

Accepted Answer

A)  The level of interest rates 
B)  Desired savings target of each household 
C)  Tastes and preferences of consumers 
D)  Level of household income 
E)  Stage of the business cycle

Question 15

Interest rates on securities issued by borrowers in the economy other than the government must reflect the different types and degrees of risk that investors in those securities must assume.

Accepted Answer

A) True 
 B)False

Question 16

Using each of the sentences or phrases listed below, indicate which key term or concept presented in this chapter goes with them:
 a. A theory of interest rates based upon changing views on the future behavior of interest rates and the value of financial assets.
b. People may save less as interest rates rise due to expected higher rates of return. 
c. A saver's asset and debt position affects his or her response to changing market interest rates.

Accepted Answer

The answer of Using each of the sentences or phrases...

Question 17

The cautionary motive for holding money arises because we live in an uncertain world and cannot predict exactly what our expenditures or even our income will be in the future.

Accepted Answer

A) True 
 B)False

Question 18

The investment demand schedule in the classical theory of interest rates slopes downward and to the right, reflecting the declining net marginal productivity of capital as the volume of investment grows.

Accepted Answer

A) True 
 B)False

Question 19

The demand for money is one of the most important concepts in the Liquidity Preference Theory of Interest. What are the three main components of the demand for money in this idea about how interest rates are determined?

Accepted Answer

The answer of The demand for money is one of...

Question 20

The wealth effect

Accepted Answer

A)  Was particularly strong in the late 1990s 
B)  Occurs when the families wealth increases which raises their consumption expenditures because their need for additional savings is reduced 
C)  Family is making above $200,000 a year 
D)  A and B above 
E)  None of the above

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

In the loanable funds theory of interest consumer demand for credit is assumed to be relatively elastic with respect to changes in the rate of interest.

The speculative demand for money states that investors speculate when interest rates are high.

What, then is the rational expectations theory of interest rates? How does it differ from earlier interest-rate determination theories, such as The Classical, Liquidity Preference and Loanable Funds ideas?

Possible explanations for the "convergence" of market interest rates in Western Europe at the inception of the European Monetary Union (EMU) include:

The theory which argues that the risk-free interest rate is determined by the interaction of the supply of savings (coming mainly from households) and the demand for investment capital (principally from business) is known as the:

According to the Rational Expectations Theory:

Ms. Jones purchased a 20-year Treasury bond bearing a 12% coupon rate. She purchased the bond at par ($1,000) . If rates fall to 9%, what will be the new price of the bond?

What are the principal limitations of the Loanable Funds Theory of Interest?

In the rational expectations theory concerning interest rates business and household decision-makers are assumed to be:

Households are savers in the economy, while businesses are not.

At low rates of interest less money is normally demanded in the economy because most investors feel bond prices must eventually rise.

Foreign demand for loanable funds is relatively insensitive to interest-rate differentials between the U.S. and the rest of the world.

The Classical theory of interest assumes that interest rates are the principal determinant of the quantity of savings and that the demand for borrowed funds comes primarily from consumers and government.

According to your text, the principal determinant of the volume of saving by households (i.e., individuals and families) is:

Interest rates on securities issued by borrowers in the economy other than the government must reflect the different types and degrees of risk that investors in those securities must assume.

The cautionary motive for holding money arises because we live in an uncertain world and cannot predict exactly what our expenditures or even our income will be in the future.

The investment demand schedule in the classical theory of interest rates slopes downward and to the right, reflecting the declining net marginal productivity of capital as the volume of investment grows.

The demand for money is one of the most important concepts in the Liquidity Preference Theory of Interest. What are the three main components of the demand for money in this idea about how interest rates are determined?

The wealth effect