Question 1

Which of the following events would cause the interest rate to rise?
A) a decrease in the demand for loanable funds
B) an increase in the demand for loanable funds
C) an increase in the supply for loanable funds
D) a decrease in aggregate demand

Accepted Answer

When the demand for loanable funds increases, lenders can charge higher interest rates because borrowers are willing to pay more to access those funds.

Question 2

Other things constant, an increase in the expected inflation rate will
A) decrease the inflationary premium.
B) increase money (nominal) interest rates.
C) increase the supply of loanable funds.
D) decrease the money interest rate.

Accepted Answer

An increase in the expected inflation rate will lead to an increase in money (nominal) interest rates. This is because lenders will demand higher interest rates to compensate for the future loss of purchasing power due to inflation.

Question 3

If expected inflation is constant and the nominal interest rate increased 3 percentage points, the real interest rate would
A) increase 3 percentage points.
B) increase, but by less than 3 percentage points.
C) decrease, but by less than 3 percentage points.
D) decrease by 3 percentage points.

Accepted Answer

The real interest rate is the nominal interest rate minus the expected inflation rate. If expected inflation is constant and the nominal interest rate increases by 3 percentage points, the real interest rate also increases by 3 percentage points.

Question 4

The "loanable funds market" is a term used by economists to describe the
A) demand for goods and services by households.
B) market that includes resources such as labor and capital.
C) supply of goods and services by firms.
D) market that coordinates the borrowing and lending of individuals and firms.

Accepted Answer

The loanable funds market specifically refers to the market where individuals and firms borrow and lend funds to each other. It is a market where the supply and demand of loanable funds intersect to determine the interest rate. This market is important for understanding how savings and investment decisions impact the overall economy.

Question 5

An increase in the real interest rate will
A) lead to an increase in the expected inflation rate.
B) increase the real cost of purchasing goods and services in the current period relative to future periods.
C) encourage borrowers to demand a larger quantity of funds.
D) reduce the quantity of funds supplied to the loanable funds market.

Accepted Answer

An increase in the real interest rate will increase the real cost of purchasing goods and services in the current period relative to future periods. This means that consumers will be more likely to save their money for future purchases instead of spending it in the current period. This will decrease the quantity of funds supplied to the loanable funds market. An increase in the real interest rate is not likely to lead to an increase in the expected inflation rate, nor is it likely to encourage borrowers to demand a larger quantity of funds.

Question 6

The difference between the money rate of interest and the real rate of interest is often called the
A) real balance effect.
B) prime interest rate.
C) inflationary premium.
D) discount rate.

Accepted Answer

The difference between the money rate of interest (nominal interest rate) and the real rate of interest is often referred to as the inflationary premium. This difference represents the additional compensation required by investors to account for the expected or anticipated inflation rates over the life of an investment.

Question 7

An increase in the real interest rate will
A) increase the inflationary premium.
B) decrease the inflationary premium.
C) increase the price of current consumption relative to future consumption.
D) decrease the price of current consumption relative to future consumption.

Accepted Answer

An increase in the real interest rate implies that the cost of borrowing money has increased. This leads to an increase in the price of current consumption relative to future consumption because individuals prefer to save money at a higher interest rate rather than spend it now. This shift in preference towards saving will increase demand for future consumption, which will drive up its price. This increase in the price of future consumption is known as the inflationary premium. Therefore, an increase in the real interest rate will not decrease the inflationary premium and it will not affect the price of current consumption.

Question 8

The real rate of interest is
A) interest paid by commercial banks.
B) interest paid by the Fed.
C) equal to the money rate of interest plus the inflationary premium.
D) the money rate of interest adjusted for inflation.

Accepted Answer

The real rate of interest is the money rate of interest adjusted for inflation. This means that it takes into account the changes in the purchasing power of money over time, and gives a more accurate measure of the cost of borrowing or return on investment. Answer A is incorrect because commercial banks pay interest, they do not receive it. Answer B is incorrect because the Fed sets the federal funds rate, but does not pay interest directly. Answer C is partially correct, as it includes the inflationary premium, but it is missing the adjustment for the money rate of interest.

Question 9

The price that a person must pay in order acquire purchasing power now rather than in the future is called
A) the interest rate.
B) the foreign exchange rate.
C) the inflationary premium.
D) the risk premium.

Accepted Answer

The price paid to acquire purchasing power now rather than in the future is the interest rate.

Question 10

The nominal (money) rate of interest
A) is the real rate of interest plus the inflationary premium.
B) can be expected to decline as inflation accelerates.
C) fell to historic lows during the 1970s when the United States experienced double-digit rates of inflation.
D) can be expected to increase when the government is running a budget surplus.

Accepted Answer

The nominal rate of interest is the sum of the real rate of interest and the inflationary premium, which compensates for expected inflation.

Question 11

The money rate of interest will be less than the real rate of interest when decision makers anticipate
A) stable prices in the future.
B) falling prices in the future.
C) inflation in the future.
D) that the money rate of interest will decline.

Accepted Answer

When decision makers anticipate falling prices in the future, they will demand less money in the future and therefore lend money at a lower interest rate. This in turn leads to a money rate of interest that is less than the real rate of interest.

Question 12

If expected inflation is constant, then when the nominal interest rate falls, the real interest rate
A) falls by more than the change in the nominal interest rate.
B) falls by the change in the nominal interest rate.
C) rises by the change in the nominal interest rate.
D) rises by more than the change in the nominal interest rate.

Accepted Answer

The real interest rate is calculated by subtracting the expected inflation rate from the nominal interest rate. If the expected inflation rate is constant, then when the nominal interest rate falls, the real interest rate will also fall by the same amount. This is because the decrease in the nominal interest rate is not offset by any change in the expected inflation rate. Therefore, the real interest rate will only change by the amount of the change in the nominal interest rate.

Question 13

The real rate of interest equals the
A) money rate of interest minus the expected inflation rate.
B) money rate of interest plus the expected inflation rate.
C) inflationary premium.
D) nominal rate of interest.

Accepted Answer

The real rate of interest is the nominal rate of interest minus the expected inflation rate. This is because inflation erodes the purchasing power of money over time, so the real rate of interest reflects the true increase in purchasing power that a lender or investor receives.

Question 14

The real interest rate is
A) the premium that borrowers must pay in order to acquire more purchasing power.
B) the reward lenders receive in exchange for their willingness to delay consumption into the future.
C) equal to the money interest rate minus the inflationary premium.
D) all of the above.

Accepted Answer

The real interest rate is indeed the premium borrowers pay for purchasing power, the reward for lenders delaying consumption, and it is calculated as the nominal interest rate minus the inflationary premium.

Question 15

Suppose business decision makers become more optimistic about future economic conditions and desire additional funds to expand their plant capacity. What is the likely effect on the loanable funds market?
A) The demand for loanable funds will increase, and the interest rate will rise.
B) The demand for loanable funds will decrease, and the interest rate will fall.
C) The supply for loanable funds will increase, and the interest rate will fall.
D) The supply for loanable funds will decrease, and the interest rate will rise.

Accepted Answer

The increased optimism of business decision makers about future economic conditions will lead to an increase in their desire for funds to expand their plant capacity. This will cause an increase in the demand for loanable funds, leading to an increase in the interest rate in the loanable funds market. This is because there will be more borrowers competing for the same amount of funds, and lenders will demand a higher interest rate in compensation for the increased risk of lending to newer and less established borrowers.

Question 16

In the loanable funds market, the price that borrowers must pay for earlier availability is the
A) inflation rate.
B) wage rate.
C) interest rate.
D) exchange rate.

Accepted Answer

The price that borrowers must pay for earlier availability is the interest rate. This is because when borrowers want to borrow funds earlier than they would be available in the regular market, lenders often charge a higher interest rate to compensate them for the opportunity cost of lending out their funds earlier than they had planned. Therefore, the interest rate serves as the price that borrowers must pay for earlier availability in the loanable funds market.

Question 17

The difference between the money interest rate and the real interest rate is the
A) prime interest rate.
B) nominal interest rate.
C) exchange rate.
D) inflationary premium.

Accepted Answer

The difference between the nominal interest rate and the real interest rate is the inflationary premium, which accounts for expected inflation.

Question 18

If the expected rate of inflation is zero, the real interest rate must
A) also equal zero.
B) be greater than the money (nominal) interest rate.
C) be equal to the money (nominal) interest rate.
D) be less than the money (nominal) interest rate.

Accepted Answer

The real interest rate is calculated by subtracting the expected rate of inflation from the money (nominal) interest rate. Therefore, if the expected rate of inflation is zero, the real interest rate will simply be equal to the money (nominal) interest rate.

Question 19

The money interest rate may be a misleading indicator of real borrowing costs when
A) the unemployment rate is high.
B) the actual rate of unemployment exceeds the natural rate of unemployment.
C) the inflation rate is high.
D) real output is declining.

Accepted Answer

When the inflation rate is high, the money interest rate may not accurately reflect the real borrowing costs because inflation erodes the purchasing power of money over time. Therefore, borrowers may still face high real borrowing costs even if the nominal interest rate appears low.

Question 20

Which of the following equations is accurate?
A) money interest rate = real interest rate − inflationary premium
B) real interest rate = money interest rate + inflationary premium
C) real interest rate = money interest rate − inflationary premium
D) real interest rate = money interest rate

Accepted Answer

The equation for real interest rate is R = M - I, where R is the real interest rate, M is the nominal interest rate or money interest rate, and I is the inflation rate. To solve for M, we can rearrange the equation as M = R + I. However, the question asks for the equation that is accurate, and the accurate equation is the original formula for real interest rate, which is R = M - I. Therefore, the correct choice is C.

Quiz 9: An Introduction to Basic Macroeconomic Markets

Which of the following events would cause the interest rate to rise?

Other things constant, an increase in the expected inflation rate will

If expected inflation is constant and the nominal interest rate increased 3 percentage points, the real interest rate would

The "loanable funds market" is a term used by economists to describe the

An increase in the real interest rate will

The difference between the money rate of interest and the real rate of interest is often called the

An increase in the real interest rate will

The real rate of interest is

The price that a person must pay in order acquire purchasing power now rather than in the future is called

The nominal (money) rate of interest

The money rate of interest will be less than the real rate of interest when decision makers anticipate

If expected inflation is constant, then when the nominal interest rate falls, the real interest rate

The real rate of interest equals the

The real interest rate is

Suppose business decision makers become more optimistic about future economic conditions and desire additional funds to expand their plant capacity. What is the likely effect on the loanable funds market?

In the loanable funds market, the price that borrowers must pay for earlier availability is the

The difference between the money interest rate and the real interest rate is the

If the expected rate of inflation is zero, the real interest rate must

The money interest rate may be a misleading indicator of real borrowing costs when

Which of the following equations is accurate?