Question 1

The reason that finding the present value of a future sum of money requires us to discount it, is that:

Accepted Answer

Discounting is necessary because waiting to receive money in the future deprives us of the opportunity to use or invest it now, which could generate returns.

Question 2

If interest rates rise, the present value of any future earnings is bound to:

Accepted Answer

When interest rates rise, the present value of future earnings decreases because the discount rate used to calculate present value is higher, making future earnings less valuable in today's terms.

Question 3

In the loanable fund's theory of interest determination, an increase in the productivity of capital equipment should lead to:

Accepted Answer

An increase in the productivity of capital equipment makes investment more attractive, leading to an increased demand for loanable funds. This increased demand, with supply remaining constant, typically results in higher interest rates.

Question 4

If savers decide to save more, ceteris paribus, the loanable funds theory predicts:

Accepted Answer

When savers decide to save more, the supply of loanable funds increases. According to the loanable funds theory, this leads to a reduction in interest rates because there is more money available for borrowing. Lower interest rates make borrowing cheaper, encouraging more investment.

Question 5

According to the Fisher hypothesis, the nominal rate of interest consists of:

Accepted Answer

The Fisher hypothesis posits that the nominal interest rate is the sum of a real interest rate (which is considered stable over the long term) and an inflation premium that varies with expected inflation.

Question 6

According to the liquidity preference theory of interest, an increase in uncertainty, other things being equal, will:

Accepted Answer

An increase in uncertainty typically leads to a higher demand for liquidity (money) as people prefer to hold cash. This increased demand for money, with a fixed money supply, leads to higher interest rates according to the liquidity preference theory.

Question 7

The ability of central banks to influence short-term interest rates rests upon:

Accepted Answer

Central banks act as lenders of last resort, providing liquidity to banks in times of financial stress. This gives them significant influence over short-term interest rates.

Question 8

A central bank which sets the short-term rate of interest must:

Accepted Answer

A central bank that sets the short-term interest rate must meet the resulting demand for reserves to maintain that rate. When the central bank sets a target for the short-term interest rate, it must supply the necessary amount of reserves to the banking system to meet the demand at that rate. If it does not, the actual rate will deviate from the target rate.

Question 9

According to --------- theory of interest, the rate of Interest is the price of credit which is determined by the demand and supply for loanable funds.

Accepted Answer

The Loanable Fund theory posits that the interest rate is determined by the demand and supply of loanable funds in the market, where demand comes from borrowers and supply from lenders.

Question 10

According to ------- theory interest arises on account of the productivity of capital.

Accepted Answer

Productivity theory suggests that interest arises due to the productive capabilities of capital. It posits that capital goods are productive, and the interest is the return on the productive use of capital.

Question 11

The Time- Preference Theory of Interest was expounded by-----------

Accepted Answer

John Rae was the one who expounded the Time-Preference Theory of Interest, which suggests that interest rates are determined by people's preference for immediate consumption over future consumption.

Question 12

----------- defined Interest as "an index of the community's preference for a dollar of present over a dollar of future income."

Accepted Answer

Fisher defined interest in this way, emphasizing the time value of money and the preference for current income over future income. This concept is fundamental in economics and finance, illustrating the trade-offs between present and future consumption.

Question 13

According to ---------- theory, Interest is the reward for the productive use of the capital which is equal to the marginal productivity of physical capital.

Accepted Answer

The answer of According to ---------- theory, Interest is the...

Question 14

Loanable Fund theory is also known as-----------

Accepted Answer

The Loanable Funds Theory is also known as the Neo-classical theory. It is an economic theory that explains the market interest rates in terms of the supply of and demand for loanable funds.

Question 15

Neo- Classical theory of interest was expounded by------------

Accepted Answer

Neo-Classical theory of interest was expounded by Knot Wicksel.

Question 16

According to Keynes, Interest is purely a 'monetary phenomenon'.

Accepted Answer

John Maynard Keynes argued that interest rates are determined by the supply and demand for money rather than the supply and demand for capital. He believed that interest is a reward for parting with liquidity for a specified period, thus making it a monetary phenomenon.

Question 17

Who propounded liquidity preference theory of interest?

Accepted Answer

The liquidity preference theory of interest was propounded by John Maynard Keynes. It suggests that the interest rate is determined by the supply and demand for money, where the demand for money is primarily influenced by liquidity preference.

Question 18

----------- is called as "Real Theory of Interest"

Accepted Answer

The Classical theory, also known as the Real Theory of Interest, posits that the interest rate is determined by the supply of savings and the demand for investment funds. It emphasizes the role of real factors (such as productivity and thrift) in the determination of the interest rate, rather than monetary factors.

Question 19

Technical consultancy Organisations were set up by........................

Accepted Answer

Technical consultancy organisations were set up by the Industrial Development Bank of India (IDBI) to provide technical and managerial assistance to small and medium enterprises.

Question 20

........................ assists mainly to industrial undertakings in the private sector

Accepted Answer

ICICI (Industrial Credit and Investment Corporation of India) mainly assists industrial undertakings in the private sector by providing them with financial assistance and various banking services.

Quiz 9: Financial Concepts and Institutions