Deck 4: The Level of Interest Rates

Question 1

The market rate of interest can be viewed as approximately equal to the real rate of interest plus a premium for the expected rate of inflation.

Answer 1

True

Question 2

The real rate of interest can be viewed as the time value of not consuming.

Answer 2

True

Question 3

An increase in the desired saving rate will increase real interest rates.

Answer 3

False

Question 4

The flow of funds forecasting method utilizes the concept of supply and demand of loanable funds.

Question 5

The current rate of inflation affects the expected level of interest rates via the Fisher Effect.

Question 6

Economic models and flow-of-funds are two ways of forecasting interest rates.

Question 7

The realized real rate of interest can be negative if expected inflation is less than actual inflation.

Question 8

Nominal interest rates reflect anticipated inflation.

Question 9

The Fisher Effect holds that nominal interest rates include a premium for expected inflation.

Question 10

Declining interest rates can be caused by an upward shift in the demand for loanable funds relative to the supply of loanable funds.

Question 11

An increase in desired investment shifts the desired savings supply line upward to higher real rates of interest.

Question 12

Expected increases in inflation usually drive up bond prices.

Question 13

Deficit spending units supply loanable funds.

Question 14

Interest rates are directly related to inflation expectations and inversely related to the level of economic activity.

Question 15

An upward shift in the supply of loanable funds is likely to increase interest rates.

Question 16

If yields on thirty-year U. S. Treasury bonds are 8% and the real rate of interest is estimated at 3%, the historical rate of inflation is 5%.

Question 17

Economic models forecast interest rates then estimate measures of economic output.

Question 18

The expected real rate of interest is almost always negative.

Question 19

If a country's currency is expected to depreciate, its interest rates may decrease.

Question 20

An increase in rates of return on real capital investment will increase real interest rates.

Question 21

In January 2011, a Japanese investor placing money in dollar denominated assets desires a 5% real rate of return. Then international expected inflation rate is about 2.5% and the dollar is expected to decline against Japanese Yen by 10% over the investment period. What is the approximate minimum required rate of return for this Japanese investor?

Question 22

Using loanable funds theory, discuss how changes in consumer savings, business investment, and in the money supply by the Federal Reserve System can influence the level of interest rates.

Question 23

Calculate the price of a $1000 face value bond, maturing in three years with a 9 percent coupon (paid semiannually) if current real rates of interest are 4 percent, historical inflation rates are 3 percent, and expected inflation rates are 4 percent. (Use if next chapter covered in exam)

Question 24

Sam has just lent Mary $1000 for 1 year at 6%. Sam and Mary expect inflation to be 3% over the next year. If inflation turns out to have been only 2%, what is the impact upon Sam and Mary?

Question 25

Explain why realized real rates of interest are sometimes negative, but expected real rates on loans are usually positive. Give an example.

Question 26

If a security's realized return is negative, the expected return was smaller than the required return.

Question 27

Explain how price expectations influence the level of interest rates. What impact has inflation premiums had on interest rate levels in recent years?

Question 28

Nominal rates generally exceed the real rate.

Question 29

TIPS yields pay investors a higher coupon rate when inflation increases.