Question 1(Multiple Choice Worth 5 points)

(04.02 MC) If the inflation rate increases, which of the following accurately describes people paying fixed-interest rate loans?

They will be required to pay more of the principal annually. They will pay a lower real interest rate. They will pay a higher real interest rate. They will pay a lower nominal interest rate. They will pay a higher nominal interest rate.

Question 2(Multiple Choice Worth 5 points)

(04.02 MC) If a person buys a $100 bond with a nominal interest rate of 5 percent and the actual inflation rate is 5 percent for the year, what real interest rate did they earn in that year?

0 percent 5 percent 10 percent 20 percent Indeterminate

Question 3(Multiple Choice Worth 5 points)

(04.02 LC) Which of the following accurately explains the reason banks cannot advertise the real interest rate they offer for loans?

Such advertising would not be competitive with other lenders. Federal regulations do not allow the real interest rate to be disclosed. The actual inflation rate cannot be known in advance. Advertising would decrease their profits. Banks never expect there to be an increase in the aggregate price level.

Question 4(Multiple Choice Worth 5 points)

(04.02 MC) If the expected rate of inflation is 3 percent and the bank charges 5 percent interest for a loan, which of the following is true?

The real interest rate is 8 percent. The nominal interest rate is 3 percent. The real interest rate is 2 percent. The bank will benefit if actual inflation is higher than 3 percent. The bank is not benefiting from any loan with those figures.

Question 5(Multiple Choice Worth 5 points)

(04.02 LC) When a bank provides a loan for a large consumer purchase, the nominal interest rate is

the real interest rate minus expected inflation the sum of actual inflation and the real interest rate set with no consideration of expected inflation always less than the real interest rate the advertised rate, unadjusted for inflation