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Chapter 02 Determinants of Interest Rates




Question;1. The real interest rate is the increment to;purchasing power that the lender earns in order to induce him or her to forego;current consumption.;True False;2. If you earn 0.5% a month in your bank account, this;would be the same as earning a 6% annual interest rate with annual;compounding.;True False;3. Simple interest calculations assume that interest;earned is never reinvested.;True False;4. An investor earned a 5% nominal rate of return over;the year. However, over the year, prices increased by 2%. The investor's real;rate of return was less than his nominal rate of return.;True False;5. Earning a 5% interest rate with annual compounding;is better than earning a 4.95% interest rate with semiannual compounding.;True False;6. For any positive interest rate the present value of;a given annuity will be less than the sum of the cash flows and the future;value of the same annuity will be greater than the sum of the cash flows.;True False;7. With a zero interest rate both the present value;and the future value of an N payment annuity would equal N x payment.;True False;8. Households generally supply more funds to the;markets as their income and wealth increase, ceteris paribus.;True False;9. An increase in the perceived riskiness of;investments would cause a movement up along the supply curve.;True False;10. An increase in the marginal tax rates for all U.S.;taxpayers would probably result in reduced supply of funds by households.;True False


Paper#55101 | Written in 18-Jul-2015

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