Question

2.  2: Interest Rates: Cost of Money

Cost of Money Four fundamental factors affect the supply of, and demand for, investment capital, hence the -Select-amountcostdesirabilityItem 1 of money. These factors are: production opportunities, time preferences for consumption, risk, and inflation. If the entire population was living at the subsistence level, time preferences for current consumption would be -Select-highlowItem 2 , savings would be -Select-highlowItem 3 , interest rates would be -Select-highlowItem 4 , and capital formation would be -Select-easydifficultItem 5 . Producers' expected returns on their business investments set a(n) -Select-lowerupperItem 6 limit on how much they can pay for savings, while consumers' time preferences for consumption establish how much consumption they are willing to delay, and, consequently, how much they will -Select-spendsaveItem 7 at different interest rates. In addition, -Select-lowerhigherItem 8 risk and -Select-lowerhigherItem 9 inflation lead to higher interest rates. Determine whether each of the statements below is true or false: Government policy doesn't influence the allocation of capital and the level of interest rates. -Select-TrueFalseItem 10 The supply curve in each market is upward sloping, which indicates that investors are willing to supply more capital the higher the interest rate they receive on their capital. -Select-TrueFalseItem 11 The interest rate in each market is the point where the supply and demand curves for capital intersect. -Select-TrueFalseItem 12 There is a price for each type of capital; however, the price remains constant due to foreign investment. -Select-TrueFalseItem 13 Complete the following statements: If the Federal Reserve tightens credit, which decreases the supply of funds, interest rates -Select-will increase.will remain constant.will decline.Item 14 If the demand for funds decline, which typically happens during a recession, interest rates -Select-will increase.will remain constant.will decline.

Answer 1