Question

5. If the annual real rate of interest is 5% and the expected inflation rate is 4%, the nominal rate of interest would be approximately

A. 1%.

B. 9%.

C. 20%. D. 15%. E. 7%.

6. If the annual real rate of interest is 2.5% and the expected inflation rate is 3.7%, the nominal rate of interest would be approximately

A. 3.7%.

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B. 6.2%. C. 2.5%. D. −1.2%. E. 4.3%.

7. You purchased a share of stock for $20. One year later you received $1 as a dividend and sold the share for $29. What was your holding-period return?

A. 45%

B. 50%

C. 5% D. 40% E. 32%

8. You purchased a share of stock for $30. One year later you received $1.50 as a dividend and sold the share for $32.25. What was your holding-period return?

A. 12.5%

B. 12.0%

C. 13.6% D. 11.8% E. 14.1%

9. Which of the following determine(s) the level of real interest rates? I) The supply of savings by households and business firms.

II) The demand for investment funds.

III) The government's net supply and/or demand for funds.

A. I only.

B. II only.

C. I and II only. D. I, II, and III. E. III only.

10. Which of the following statement(s) is (are) true?

I) The real rate of interest is determined by the supply and demand for funds.

II) The real rate of interest is determined by the expected rate of inflation.

III) The real rate of interest can be affected by actions of the Fed.

IV) The real rate of interest is equal to the nominal interest rate plus the expected rate of inflation. A. I and II only.

B. I and III only.

C. III and IV only.

D. II and III only.

E. I, II, III, and IV only.

11. Which of the following statements is true?

A. Inflation has no effect on the nominal rate of interest.

B. The realized nominal rate of interest is always greater than the real rate of interest.

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C. Certificates of deposit offer a guaranteed real rate of interest.

D. Certificates of deposit offer a guaranteed nominal rate of interest.

E. Inflation has no effect on the nominal rate of interest, the realized nominal rate of interest is always greater than the real rate of interest, and certificates of deposit offer a guaranteed real rate of interest.

12. Other things equal, an increase in the government budget deficit A. drives the interest rate down.

B. drives the interest rate up.

C. might not have any effect on interest rates.

D. always increases business prospects. E. never increases business prospects.

13. Ceteris paribus, a decrease in the demand for loanable funds A. drives the interest rate down.

B. drives the interest rate up.

C. might not have any effect on interest rates.

D. results from an increase in business prospects and a decrease in the level of savings. E. results from an increase in business prospects and a increase in the level of savings.

Answer 1

5. The answer is B.9%.

The approximate nominal interest rate can be calculated by adding real interest rate and expected inflation rate.

approximate nominal interest rate = real interest rate + expected inflation rate = 5%+4% = 9%

The accurate way of calculating nominal interest rate is as below:

Nominal interest rate = [(1+real interest rate)*(1+inflation rate)] - 1 = [(1+0.05)*(1+0.04)] - 1 = (1.05*1.04) - 1 = 1.092 - 1 = 0.092 or 9.2%

6. The answer is B.6.2%.

The approximate nominal interest rate can be calculated by adding real interest rate and expected inflation rate.

approximate nominal interest rate = real interest rate + expected inflation rate = 2.5%+3.7% = 6.2%

The accurate way of calculating nominal interest rate is as below:

Nominal interest rate = [(1+real interest rate)*(1+inflation rate)] - 1 = [(1+0.025)*(1+0.037)] - 1 = (1.025*1.037) - 1 = 1.062925‬ - 1 = 6.29%

7. The answer is B.50%.

Holding period return = [(selling price + dividend received)/purchase price] - 1

  Holding period return = [($29+$1)/$20] - 1 = ($30/$20) - 1 = 1.5 - 1 = 0.5 or 50%

8. The answer is A.12.5%.

Holding period return = [(selling price + dividend received)/purchase price] - 1

  Holding period return = [($32.25+$1.50)/$30] - 1 = ($33.75/$30) - 1 = 1.125 - 1 = 0.125 or 12.5%