Question 1

An increase in the nominal interest rate, all else held constant, will always cause which of the following?

Accepted Answer

A)   The demand for money to decrease.
B)   The expected inflation rate to decrease.
C)   The real interest rate to decrease.
D)   The demand for money to increase.
E)   The inflation rate to decrease.

Question 2

Suppose that the nominal interest rate and expected inflation rate both increase by 3%. These equal increases in the nominal interest rate and expected inflation rate will cause:

Accepted Answer

A)   an increase in the real interest rate.
B)   a decrease in government spending.
C)   a decrease in money demand.
D)   a decrease in investment.
E)   a decrease in the real interest rate.

Question 3

With a nominal interest rate of 22%, the present discounted value of $1100 to be received in one year is:

Accepted Answer

A)   $796.54.
B)   $690.54.
C)   $901.64.
D)   $646.54.
E)   $851.54.

Question 4

The present discounted value of a future payment becomes smaller when:

Accepted Answer

A)   the payment itself decreases.
B)   the real interest rate decreases.
C)   the payment itself increases.
D)   the nominal interest rate decreases.
E)   the payment is made sooner rather than later.

Question 5

Assume that the inflation rate is positive. Given this information, which of the following is always true?

Accepted Answer

A)   The nominal interest rate must be greater than the real interest rate.
B)   The real interest rate is negative.
C)   The real interest rate is greater than the nominal interest rate.
D)   The nominal interest rate must be equal to the real interest rate.
E)   The real interest rate is positive.

Question 6

Lower money growth tends to cause:

Accepted Answer

A)   no change in i and r in the medium run.
B)   an increase in i in the medium run and an increase in r in the medium run.
C)   a decrease in i in the medium run and no change in r in the medium run.
D)   an increase in i in the medium run and no change in r in the medium run.
E)   no change in i in the medium run and an increase in r in the medium run.

Question 7

Suppose the Reserve Bank of Australia pursues contractionary monetary policy. This policy move will tend to cause:

Accepted Answer

A)   no change in i in the medium run and an increase in r in the medium run.
B)   a decrease in i in the medium run and a decrease in r in the medium run.
C)   a decrease in i in the medium run and no change in r in the medium run.
D)   an increase in i in the medium run and no change in r in the medium run.
E)   no change in i in the medium run and a decrease in r in the medium run.

Question 8

Suppose there is an increase in government spending. Such a fiscal policy action will cause:

Accepted Answer

A)   the natural real interest rate to rise.
B)   the natural real interest rate to fall.
C)   ambiguous effects on the natural real interest rate.
D)   no effect on the natural real interest rate.
E)   the natural real interest rate falls when the nominal rate falls.

Question 9

Suppose the central bank engages in contractionary monetary policy that results in lower money growth. This lower money growth will cause which of the following in the medium run?

Accepted Answer

A)   Lower real interest rates and lower nominal interest rates.
B)   Lower real interest rates and higher nominal interest rates.
C)   Higher real interest rates and higher nominal interest rates.
D)   Higher real interest rates and lower nominal interest rates.
E)   No change in real interest rates and lower nominal interest rates.

Question 10

Which of the following explains why the Great Depression did not end sooner?

Accepted Answer

A)   An increase in the nominal money stock.
B)   An increase in the price level.
C)   The presence of deflation.
D)   A relatively passive use of monetary policy.
E)   Both C and D.

Question 11

The Fisher effect summarises the effects of:

Accepted Answer

A)   inflation on the real interest rate in the medium run.
B)   inflation on the real interest rate in the short run.
C)   inflation on the nominal interest rate in the short run.
D)   inflation on the natural real interest rate in the short run.
E)   inflation on the nominal interest rate in the medium run.

Question 12

Discuss how a manager of a mining company would use the expected present discounted value to make decisions on whether to purchase machines and equipments to develop a new mine.

Accepted Answer

On the cost side she would have numbers ...

Question 13

To reduce the nominal interest rate in the short run, what type of policy should the central bank pursue? Explain.

Accepted Answer

The central bank most likely should purs...

Question 14

A consol bond promises to pay $1500 each year, forever, starting next year. If the nominal interest rate is 6%, the present discounted value of this consol is:

Accepted Answer

A)   $20000.00.
B)   $15000.00.
C)   $24000.00.
D)   $25000.00.
E)   $18000.00.

Question 15

Explain what the Fisher effect/Fisher hypothesis represents.

Accepted Answer

The Fisher effect represents the medium-...

Question 16

Assume that the nominal interest rate is equal to 0. Use this information and the information about the payments provided below, rank the following three sequences of payments according to their present value.

Accepted Answer

A)   B > A > C
B)   A > C > B
C)   C > B > A
D)   A > B > C
E)   None of the above.

Question 17

From 1929 to 1932, U.S. output growth was:

Accepted Answer

A)   consistently negative.
B)   negative in the first few years, and then mostly positive in the remaining years.
C)   negative in the first few years, and then zero in the remaining years.
D)   consistently near zero.
E)   consistently positive.

Question 18

Suppose the economy is initially operating at the natural level of output. Now, suppose the central bank raises the inflation target by 2.5%. Given this information, we would expect that:

Accepted Answer

A)   the nominal interest rate will increase by more than 2.5% in the medium run.
B)   the nominal interest rate will increase by exactly 2.5% in the medium run.
C)   the nominal interest rate will fall by exactly 2.5% in the medium run.
D)   the nominal interest rate will fall by less than 2.5% in the medium run.
E)   the nominal interest rate will not change in the medium.

Question 19

Suppose households feel less optimistic about the future and decide to reduce consumption. This fall in consumer confidence will cause:

Accepted Answer

A)   the natural real interest rate to rise.
B)   the natural real interest rate to fall.
C)   ambiguous effects on the natural real interest rate.
D)   no effect on the natural real interest rate.
E)   the natural real interest rate falls when the nominal rate falls.

Question 20

Assume that expected inflation is zero, then we know that:

Accepted Answer

A)   the nominal interest rate will exceed the real interest rate.
B)   the real interest rate will be zero.
C)   the real interest rate will exceed the nominal interest rate.
D)   the nominal and real interest rates are equal.
E)   the real interest is negative.

Exam 14: Expectations: the Basic Tools

An increase in the nominal interest rate, all else held constant, will always cause which of the following?

Correct AnswerverifiedShow Answer

The present discounted value of a future payment becomes smaller when:

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With a nominal interest rate of 22%, the present discounted value of $1100 to be received in one year is:

Correct AnswerverifiedShow Answer

Which of the following explains why the Great Depression did not end sooner?

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Suppose there is an increase in government spending. Such a fiscal policy action will cause:

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Suppose the economy is initially operating at the natural level of output. Now, suppose the central bank raises the inflation target by 2.5%. Given this information, we would expect that:

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Suppose the Reserve Bank of Australia pursues contractionary monetary policy. This policy move will tend to cause:

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Suppose households feel less optimistic about the future and decide to reduce consumption. This fall in consumer confidence will cause:

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Assume that the inflation rate is positive. Given this information, which of the following is always true?

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Assume that the nominal interest rate is equal to 0. Use this information and the information about the payments provided below, rank the following three sequences of payments according to their present value.

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A consol bond promises to pay $1500 each year, forever, starting next year. If the nominal interest rate is 6%, the present discounted value of this consol is:

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Assume that expected inflation is zero, then we know that:

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Discuss how a manager of a mining company would use the expected present discounted value to make decisions on whether to purchase machines and equipments to develop a new mine.

Correct AnswerverifiedOn the cost side she would have numbers ...View AnswerShow Answer

Suppose the central bank engages in contractionary monetary policy that results in lower money growth. This lower money growth will cause which of the following in the medium run?

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Suppose that the nominal interest rate and expected inflation rate both increase by 3%. These equal increases in the nominal interest rate and expected inflation rate will cause:

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The Fisher effect summarises the effects of:

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From 1929 to 1932, U.S. output growth was:

Correct AnswerverifiedShow Answer

Explain what the Fisher effect/Fisher hypothesis represents.

Correct AnswerverifiedThe Fisher effect represents the medium-...View AnswerShow Answer

To reduce the nominal interest rate in the short run, what type of policy should the central bank pursue? Explain.

Correct AnswerverifiedThe central bank most likely should purs...View AnswerShow Answer

Lower money growth tends to cause:

Correct AnswerverifiedShow Answer

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On the cost side she would have numbers ...
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The Fisher effect represents the medium-...
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The central bank most likely should purs...
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Correct Answer
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