Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 25, Problem 4.2P
To determine
Reason for there is a negative relationship between the amount of money that the people should hold and the interest rate.
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Bankers make loans in the Nominal Interest Rate, so why do bankers care so much about the Real Interest Rate?
As a lender/depositor, how would you compare time to demand deposits?
Demand deposits are more liquid, but time deposits pay a higher interest rate
Demand deposits are more liquid, but time deposits pay a lower interest rate
Demand deposits are less liquid, but time deposits pay a higher interest rate
Demand deposits are less liquid, but time deposits pay a lower interest rate
Use the graph to explain why changes in the supply of money affect the quantity of money demanded.
Chapter 25 Solutions
Principles of Economics (12th Edition)
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- Draw a graph of a typical Real and Nominal Interest Rates (Three-Month TreasuryBills), and discuss why it usually takes that change.arrow_forwardDo the financial institutions usually quote the interest rate on an annual basis?arrow_forwardThe demand for money increases when the interest rate increases. Is it true or false?arrow_forward
- Suppose the nominal interest rate on savings deposits is 3% and inflation is running at 5%. What happens to your money and the real interest rate?arrow_forwardWhich of the following statements represent a use of money that is not consistent with its definition? "I got some money at the ATM with my debit card," "I just used my credit card as money to buy a new television." "I wrote a check on my deposit account to pay for dental services." "I will accept either currency or gold as money for the purchase of my house."arrow_forwardA European investor lives near one of his country’s borders. In Country A (where he lives), banks are offering an 8% interest rate and the inflation rate is 3%. Country B, on the other hand, has an inflation rate of 23%, and banks are offering 26% interest on deposits. a. What real or effective interest rate does the investor earn when investing in his own country? b. The investor believes that the currency of Country B will not change in its value relative to the value of the currency of Country A during this year. In which country would he get a larger effective interest rate? c. Suppose that he invests in a bank in Country B and that his prediction turns out to be wrong: the currency of Country B was devaluated 20% with respect to the exchange value of Country A’s currency. What effective interest rate would he obtain in this case?arrow_forward
- What is the difference between real vs. nominal interest rates? What is the ‘term structure’ of interest rates? What is the current level of interest rates, and what does the Fed say will happen to interest rates in the near future?arrow_forwardInterest rates have been changing dramatically. Do you expect interest rates to continue to change? Which way do you think they will move – up or down? In general, comment on why the Federal Reserve changes interest rates (or adjusts the discount rate). What is the Federal Reserve trying to do if it “cuts interest rates” and what is it trying to do if it “raises interest rates”?arrow_forwardExplain the impact of interest rate change in a bank income and net wortharrow_forward
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