$$ \frac{160}{2000} \times 100\% = 8\% $$

Question 1

Which of the following best describes the concept of net wealth (net worth)?

Accepted Answer

The value of all assets minus the value of liabilities an individual owes.

Question 2

Suppose you borrow $$2,000 today and agree to repay it in one year with an interest payment of 160. $$What is the annual interest rate on this loan?

Accepted Answer

$$ \frac{160}{2000} 	imes 100\% = 8\% $$

Question 3

If the nominal interest rate is 6\% and the expected inflation rate is 2\%, what is the real interest rate according to the Fisher equation?

Accepted Answer

$$ r = i - \pi^e = 6\% - 2\% = 4\% $$

Question 4

Which of the following is NOT included in the credit market?

Accepted Answer

Stocks (equity)

Question 5

Why do lenders demand a higher nominal interest rate when inflation is anticipated?

Accepted Answer

To compensate for the expected decline in the purchasing power of money.

Question 6

If the real interest rate decreases, what is the likely effect on investment?

Accepted Answer

Investment will increase because the expected profitability of projects rises.

Question 7

A bond with a face value of $$1,000 pays a 50 $$coupon each year. If the market interest rate rises, what happens to the price of this bond?

Accepted Answer

The price of the bond decreases.

Question 8

Which of the following best explains why one dollar received in the future is worth less than one dollar today?

Accepted Answer

Because the interest rate is generally greater than zero.

Question 9

What is the present value of $500 to be received in one year if the interest rate is 8\%?

Accepted Answer

$$ PV = \frac{500}{1 + 0.08} = 462.96 $$

Question 10

Which of the following is an example of capital gain?

Accepted Answer

The market value of your house increases.

Question 11

If the Federal Reserve raises its benchmark interest rate, what is the most likely immediate effect on credit cards and mortgages?

Accepted Answer

They become more expensive for borrowers.

Question 12

Which of the following best describes the relationship between risk and interest rates in the credit market?

Accepted Answer

Riskier loans command higher interest rates.

Question 13

Which of the following is a correct statement about the supply of loanable funds?

Accepted Answer

It is the relationship between the quantity of loanable funds supplied and the real interest rate, holding other influences constant.

Question 14

Which of the following is NOT a type of financial risk discussed in the module?

Accepted Answer

Inflation risk

Question 15

If unexpected inflation occurs, who is most likely to benefit?

Accepted Answer

Borrowers

Question 16

Which of the following best describes a bond?

Accepted Answer

A debt security obligating the issuer to repay principal and make periodic interest payments.

Question 17

A saver deposits $1,000 in a bank account with a 3\% annual interest rate. How much will the account be worth after one year?

Accepted Answer

$$ 1,000 	imes 1.03 = 1,030 $$

Question 18

Which of the following is a plausible reason why mortgage interest rates are typically lower than unsecured personal loan rates?

Accepted Answer

Mortgages are secured by collateral, reducing lender risk.

Question 19

Which of the following is a direct effect of a lower real interest rate on household consumption?

Accepted Answer

Household consumption increases because the opportunity cost of borrowing decreases.

Question 20

Which of the following statements about financial assets is correct?

Accepted Answer

Stocks are direct claims on physical capital, while bonds are indirect claims.

Credit Market and Interest Rates: Principles of Macroeconomics Study Notes

Study Guide - Practice Questions