d. $565,476,20 c. 5579,496,27 5. The Eederal Reserve tends to take actions to increace interest rates when the economy is very strong and to decrease nuses when the ccoconty- is weak. a. True b. False 6. Your bank account pays an 85 nominal rate of interest. The intereit is compounded quaterly. Which of the following statements is CORRECT? a. The periodic rate of interes is 2% and the effective rale of interest is 4% b. The periodic rafe of interest is 4% and the effoctive rale of interest is less than 88. c. The periodic rade of interest is 8% and the effective rate of interest is also 8h. d. The periodic rate of interest is 8% and the effective rate of interest is greater than 8% e. The periodic rate of interest is 2% and the effective rate of interest is greater than 8% 7. One of the four most fundamental factors that affect the cost of money as discussed in the text is the availability of production opportunities and their expected rates of return. If production opportunities are relatively good, then interest rates will tend to be relatively high, other things beld constant. a. True b. False 8. Which of the following statements is CORRECT? a. Downward sloping yield curves are inconsistent with the expectations theory. b. Yicld curves must be either upward or dowaward sloping - they cannot first rise and then decline. c. If the pure expectations thcory is correct, a downward sloping yicld curve indicates that interest rates are expected to decline in the future. d. The actual shape of the yield curve depends only on expectations about future inflation. e. If the yield curve is upward sloping. the maturity risk premium must be positive and the inflation rate must be zero. 9. Assume that the curreat corporate bond yicld curve is upward sloping, or normal. Under this condition, we could be sure that. a. Inflation is expected to decline in the future b. Long-term interest rates are more volatile than shent-term rates. c. Maturity risk premiams could belp to explain the yield curve's upwart slope. d. Long-term bonds are a better buy than short-1erm bonds. e. The economy is not in a recession. 10. Which of the following would be most likely to lead to a higher level of interest rates in the economy? a. The level of inflation begins to decline. b. Corporations ssep up thcir expansion plans and thas inctease their demand for eapital. c. The Federal Reserve decides to try to stimulare the economy. d. The economy moves from a boom to a recession. e. Households start saving a larger percentage of their income. 11. Suppose the U.S. Treasury issued $50 hillion of short-1erm securities and sold them to the public. Other things heid constant, what would be she most likely effect on short-term securities? prices and interest rates? a. Prices would rise and interest mates would decline. b. Prices and interest rates woold both decline. c. Prices and interest rates would both rise. d. There is no reason to expect a change in either prices or interest rates. c. Prices would decline and interest rates would rise. 12. Which of the following investments would have the highest furure vilue at the end of 10 years? Assame that the effective annual rate for all investments is the same and is gretter than zero. a. Investment D pays $2,500 at the end of 10 years (just one payment). b. Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). c. Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments). d. Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments)
