ch04 - Chapter 4 Interest Rates TRUE-FALSE QUESTIONS T 1...

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Chapter 4 Interest Rates TRUE-FALSE QUESTIONS T 1. The interest rate is the basic price that equates the demand for supply of loanable funds in the financial markets. T 2. Interest rates will move from one equilibrium level to another if an anticipated change occurs that causes the demand for loanable funds to change. T 3. Borrowers will demand funds from lenders so long as they can invest the funds and earn a satisfactory return above the cost of their loans. T 4. A “shock” may be defined as an unanticipated change that will cause the demand for, or supply of loanable funds to change. T 5. Short-term interest rates generally move up and down with the business cycle. T 6. The loanable funds theory states that interest rates are a function of the supply of and demand for loanable funds. F 7. If the supply of funds decreases, holding demand constant, interest rates will tend to fall. T 8. There are two basic sources of loanable funds: current savings and the expansion of deposits of depository institutions. F 9. An economy with a large share of young people will have more total savings than one with more late middle-aged people. T 10. The more effectively the life insurance industry promotes the sale of whole life and endowment insurance policies, the larger the volume of savings. T 11. Congress generally gives little consideration to interest rates in its spending programs. T 12. Government borrowing may have a major influence on the demand for funds.
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T 13. While the Federal Reserve strongly influences the supply of funds, the Treasury’s major influence is on the demand for funds, as it borrows heavily to finance federal deficits. F 14. Interest rates in the United States are only influenced by domestic factors. F 15. The interest rate that is observed in the marketplace is called a real interest rate. T 16. The real rate of interest is the interest rate on a risk-free financial debt instrument with no inflation expected. T 17. The maturity risk premium is the compensation expected by investors due to interest rate risk on debt instruments with longer maturity. T 18. There is an inverse relation between debt instrument prices and nominal interest rates in the marketplace. F 19. The shorter the maturity of a fixed-rate debt instrument, the greater the reduction in its value to a given interest rate increase. T 20. The liquidity premium is compensation for those financial debt instruments that cannot be easily converted to cash at prices close to their estimated fair market values. T 21. When income is high, savings tend to increase. F 22. The most important holders of Treasury bills are corporations and individuals. F 23. Treasury bonds may be issued with any maturity but generally have an original maturity in excess of one year.
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This note was uploaded on 11/01/2011 for the course ACC 200 taught by Professor Minliu during the Spring '11 term at Universidad Europea de Madrid.

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ch04 - Chapter 4 Interest Rates TRUE-FALSE QUESTIONS T 1...

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