Question

1. The "real" interest rate is the yield to maturity:

A plus the inflation rate

B minus the inflation rate

C plus the discount rate

D minus the discount rate

2. If the real Gross Domestic Product of the G-20 countries is growing at a faster rate than real Gross Domestic Product growth in the United States, then the value of the U.S. dollar can be expected to:

A appreciate

B depreciate

C fluctuate

D stagnate

3. An increasing Consumer Confidence Index indicates that:

A consumers are confident in the overall economy and future spending is likely to increase

B consumers are not confident in the current overall economy but future spending is likely to fall

C consumers are likely to curtail spending on credit

D consumers plan on saving more money

Answer 1

1.B The real interest rate= Yield to maturity- inflation rate.

Consumers expenses will increase at a rate of inflation. So, to forgone that spending, investors need to receive a minimum return of inflation rate. The excess of inflation rate is the real rate of return.

2. B If the real GDP of US is growing at slower pace than G-20, that means the inflation rate is high in the US economy(real GDP=Nominal GDP-inflation). If inflation persists in any economy, the currency of that particular country depreciates. This is because investors will pull out the money from US because their real rate of return falls. Cash outflows from the economy means too much selling of US dollars which results in depreciation of the currency.

3.A Consumer Confidence Index is a survey which tells whether consumers are optimistic or pessimistic about the future economic growth. If the confidence index is increasing, consumers are optimistic abou the future which results in increase in the future spending.