(a)
Whether the given statement is true, false or uncertain.
(a)
Answer to Problem 1QAP
The statement is false.
Explanation of Solution
The nominal interest rate is measured in terms of money and the real interest rate, which is adjusted for inflation, is measured in terms of goods. Thus, the given statement is false.
(b)
Whether the given statement is true, false or uncertain.
(b)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
The difference between the expected inflation rate and the nominal interest rate is equal to the real interest rate.
Thus, any changes in real interest rate will lead to movement in nominal interest rate, keeping expected inflation constant. Hence, the given statement is true.
(c)
Whether the given statement is true, false or uncertain.
(c)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
During 2013, the nominal interest rate in the US was around 0.25 as the economy was recovering from sub-prime crises. Thus, it is true that the nominal interest rate was at the zero level bound in the US in 2013.
(d)
Whether the given statement is true, false or uncertain.
(d)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
The relation between expected inflation, nominal interest rate and real interest rate is given as followsL
Thus, it is true that when expected inflation increases, the real rate of interest falls.
(e)
Whether the given statement is true, false or uncertain.
(e)
Answer to Problem 1QAP
The statement is false.
Explanation of Solution
There are different types of bonds with different levels of risk involved. Thus, the statement that all bonds have similar risk of default and hence pay equal rates of interest is false.
(f)
Whether the given statement is true, false or uncertain.
(f)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
It is the central bank of the economy that sets nominal rate of interest. Thus, the given statement that the nominal interest rate is set by the central bank is true.
(g)
Whether the given statement is true, false or uncertain.
(g)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
The leverage ratio is a bank's debt ratio against its equity/capital. A high leverage ratio implies that a firm has done a lot of investment from the credit taken.
Thus, chances of bankruptcy increase with higher leverage ratio.
However, if the credit taken is used in an efficient manner, then high leverage ratio leads to a rise in expected profit.
Thus, the statement that a rise in a banks’s leverage ratio leads to increase in both the expected profit of the bank and the risk of the bank going bankrupt is true.
(h)
Whether the given statement is true, false or uncertain.
(h)
Answer to Problem 1QAP
The statement is false.
Explanation of Solution
The rate at which money is borrowed is known as the borrowing rate and the policy rate measures the lending rate of the central bank. The two rates may differ in context of risk premium.
Thus, the statement that real borrowing rate and the real policy rate always move on the same direction is false.
(i)
Whether the given statement is true, false or uncertain.
(i)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
Financial crises include loss in the value of assets, stock market crashes and other currency crises.
In such situations, it gets difficult to measure the assets of banks and other financial intermediaries. Thus, the given statement is true.
(j)
Whether the given statement is true, false or uncertain.
(j)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
A high leverage implies high debt-equity ratio and in case of low liquidity, financial institutions are not able to convert their assets into cash easily.
Thus, the statement when a bank has high leverage and low liquidity, it may have to sell assets at fire sale prices is true.
(k)
Whether the given statement is true, false or uncertain.
(k)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
Any deposit by public with the banks includes the liabilities of the banks. Banks have to present such deposits on immediate
Thus, the given statement that banks and other financial intermediaries have assets that are less liquid than their liabilities is true.
(l)
Whether the given statement is true, false or uncertain.
(l)
Answer to Problem 1QAP
The statement is false.
Explanation of Solution
The housing prices in the US economy fell significantly2005 onwards. Thus, the given statement that house prices rose constantly in the U.S. economy since 2000 is false.
(m)
Whether the given statement is true, false or uncertain.
(m)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
Fiscal policy refers toincrease in government spending or decrease in tax rates. Such policy help in stimulating aggregate demand to reduce recession.
Thus, the given statement that the fiscal stimulus program adopted by the United States in relation to the financial crises helped counter the fall in aggregate demand and reduce the size of the recession is true.
(n)
Whether the given statement is true, false or uncertain.
(n)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
Fiscal policy involves large government expenditure which further leads to rise in budget deficit.
Thus, the given statement that fiscal stimulus program adopted by the United States included a large increase in the deficit measured as a percent of
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Chapter 6 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
- Jake receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario. Given the real interest rate of 4.5% per year, find the nominal interest rate on Jake's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate (Percent) Real Interest Rate (Percent) Nominal Interest Rate (Percent) After-Tax Nominal Interest Rate (Percent) After-Tax Real Interest Rate (Percent) 2.0 4.5 9.5 4.5 Compared with lower inflation rates, a higher inflation rate will (a. increase, b. decrease) the after-tax real interest rate when the…arrow_forwardSuppose banks require a real interest rate of 10 percent. If they expect inflation to be 2 percent, what is the nominal interest rate? Multiple Choice 5 percent 20 percent 8 percent 12 percentarrow_forwardFelix receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 2.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario. Given the real interest rate of 2.5% per year, find the nominal interest rate on Felix's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Compared with lower inflation rates, a higher inflation rate will _______ (increase/decrease) the after-tax real interest rate when the government taxes nominal interest income. This tends to ________ (encourage/discourage) saving, thereby ________ (increasing/decreasing) the quantity of investment in the economy and ________ (increasing/decreasing) the economy's long-run…arrow_forward
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- Nick receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 20%. The following table shows two scenarios: a low-inflation scenario and a high- inflation scenario. Given the real interest rate of 4% per year, find the nominal interest rate on Nick's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) 1.5 4.0 8.0 4.0 Compared with higher inflation rates, a lower inflation rate will the after-tax real interest rate when the government taxes the quantity of investment in the economy and nominal interest income. This tends to…arrow_forwardSuppose I lend my friend Peter $100 for one year, and he agrees to repay me with interest. We each have an expectation that the inflation rate over the coming year will be 5 percent, and so we agree that he will pay me back at a nominal rate of 7 percent interest. a) What real rate of return do I expect to receive? b) What happens if inflation turns out to be 8 percent over the year? Who is made better off and who is made worse off? c) What happens if inflation turns out to be 3 percent over the year? Who is made better off and who is made worse off?arrow_forwardHand written solutions are strictly prohibitedarrow_forward
Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
