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Fin 221: Sample MCQ –chapter 4
1. All, except one of the following is 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.
2. Which one of the following factors does not influence 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.
3. Which of the following 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.
4. The Fisher effect is a theory which states 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.
5. If the real rate of interest is 4%, actual inflation for the last year was 5%, and
expected inflation is 8%, according to the Fisher effect, what is the current
level of nominal interest rates?
a.
9 percent
b. 8 percent
c.
13 percent
d. 12 percent
6. The demand for loanable funds may shift upward (increase) from:
a. a decline in the supply of loanable funds.
b. a decline in business prospects.
c. an improvement in technology.
d. an expectation of an upcoming recession.
7. All except one of the following affect the supply of loanable funds?
a. the level of income.
b. the investment opportunities in the economy.
c. the savings rate
d. the Central Bank monetary policy actions.
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8. An increase in the rate of expected inflation will:
a. shift the demand for loanable funds downward.
b. shift the supply of loanable funds downward.
c. shift the demand and supply for loanable funds upward decreasing
interest rates.
d. shift the demand and supply for loanable funds upward increasing
interest rates.
9. If the actual rate of inflation is less than the rate expected during a period:
a. borrowers benefited at the expense of lenders.
b. lenders benefited at the expense of borrowers.
c. both borrowers and lenders benefited.
d. neither borrowers or lenders benefited.
10. A decrease in interest rates may best be related to:
a. a recession and a decline in inflationary expectations.
b. an acceleration in the growth rate of M1.
c. decreased real investment opportunities.
d. all of the above.
11. An investor earned 12 percent last year, a year when actual inflation was 9
percent and was expected to have been 6 percent. The investor realized real rate
of return was:
a. 3 percent.
b. 6 percent.
c. 18 percent.
d. 12 percent.
12. Which of the following is more likely to adversely affect long-term bond prices?
a. a forecast of lower inflation in the future.
b. a forecast of a slower economy next year.
c. a forecast of higher inflation in the future.
d. a forecast of lower government budget deficits.
13. Which of the following is best associated with interest rate movements
and inflation?
a. interest rates move inversely with inflation.
b. interest rates vary directly with expected inflation.
c. interest rates vary directly with past inflation rates.
d. inflation is affected by expected interest rates.
Answers: 1.c ; 2. a ; 3. c ; 4. b ; 5. d ; 6. c ; 7. b ; 8. d ; 9. b ; 10. d ; 11. a ;
12. c ; 13. b