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Question

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1.Interest is

a.the price of money.

b.the rent on money.

c.time value of delayed consumption.

d.all of the above.

2.Which one of the following is NOT an explanation for paying interest on borrowed money?

a.Interest is the rental cost of purchasing power.

b.Interest is the penalty paid for consuming income before it is earned.

c.Interest is always paid at the maturity of a loan.

d.Interest is the time value of delayed consumption.

3.Which of the following factors influence the real rate of interest?

a.investor's positive time preference

b.the gold supply

c.return on capital investments

d.the rate of inflation

e.both a and c

4.All but one of the following factors influences the real rate of interest?

a.the rate of inflation

b.investor positive time preference for current versus future consumption.

c.the return on alternative real investments.

d.the real level of output in the economy.

5.________ real rates are almost always positive; _______real rates may be negative.

a.Realized; expected

b.Expected; realized

c.Government; private

d.Expected; expected

6.Which statement is true about interest rate movements?

a.Interest rates move counter-cyclically with the business cycle.

b.Long-term interest rates have greater swings than short-term rates.

c.The expected rate of inflation impacts the level of interest rates.

d.Bond prices and interest rates move directly with one another.

7.Which one of the following statements about interest rates is incorrect?

a.Bond prices and interest rates change inversely with one another.

b.The expected rate of inflation affects current market interest rates.

c.Short-term interest rates are not as volatile as long-term interest rates.

d.Interest rates are directly related to the level of output in the economy.

8.The Fisher effect is a theory which holds that

a.nominal rates include the real rate of interest plus past annual inflation rates.

b.nominal rates include the real rate of interest plus expected annual inflation rates.

c.real rates are always positive.

d.inflation has no impact upon interest rates.

9.If nominal interest rates are 10% and expected inflation is 5%, according to Fisher equation,

a.actual inflation exceeds 10%.

b.the real rate of interest is 5%.

c.market rates are expected to increase to 15%.

d.expected interest rates are 5%.

10.If the real rate of interest is 4%, actual inflation for the last year was 5%, and expected inflation is 8%, the Fisher effect predicts what current level of nominal interest rates?

a. 9%

b. 8%

c. 13%

d. 12%