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CHAPTER 4 TRUE-FALSE QUESTIONS (T) 1. The real rate of interest can be viewed as the time value of not consuming. (F) 2. The current rate of inflation affects the expected level of interest rates. (T) 3. The market rate of interest can be viewed as the real rate of interest plus a premium for the expected rate of inflation. (F) 4. Declining interest rates can be caused by an upward shift in the demand for loanable funds relative to the supply of loanable funds. (F) 5. The expected real rate of interest is likely to be negative. (T) 6. The realized real rate of interest can be negative if expected inflation is less than actual inflation. (F) 7. An increase in desired investment shifts the desired savings supply line upward to higher real rates of interest. (T) 8. Nominal interest rates reflect anticipated inflation. (F) 9. Expected increased inflation usually drives up bond prices. (F) 10. Interest rates are directly related to inflation expectations and inversely related to the level of economic activity. (F) 11. An upward shift in the supply of loanable funds is likely to increase interest rates. (T) 12. An increase in rates of return on real capital investment will increase real interest rates. (F) 13. An increase in the desired saving rate will increase real interest rates. (F) 14. Deficit spending units supply loanable funds. (F) 15. 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%. (T) 16. The Fisher Effect holds that nominal interest rates include an expected inflation rate. (T) 17. Economic models and flow-of-funds are two ways of forecasting interest rates. (F) 18. Economic models forecast interest rates then estimate measures of economic output. (T) 19. The flow of funds forecasting method utilizes the concept of supply and demand of loanable funds. (F) 20. Interest rate forecasting using economic models assumes that financial markets are very efficient. 43
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(T) 21. Nominal rates generally exceed the real rate. MULTIPLE-CHOICE QUESTIONS (c) 1. Interest is a. the price of money. b. the rent on money. c. time value of delayed consumption. d. all of the above. (c) 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. (e) 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 (a) 4. All but one of the following factors influences the real rate of interest. a.
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