HW 7 ECON 252 Questions with Correct Answers (Grade A+)
Question 1: What is the difference between nominal and real interest rates?
Answer: The real interest rate is the nominal interest rate adjusted for inflation. The nominal interest rate is
the rate you pay on a loan
Question 2: The credit demand curve slopes downward because ____________.
Answer: a lower real interest rate raises a borrowing firm's profit and hence its willingness to borrow.
Question 3: A shift in the credit demand curve can be caused by ___________.
Answer: A. changes in perceived business opportunities for firms. B. changes in government policy. C.
changes in household preferences or expectations.
Question 4: What are some factors that explain why people save for the future? (Check all that apply .)
Answer: C. People save to invest in a personal business. D. People save for retirement. .E. People save for
their children.
Question 5: A shift in the credit supply curve can be caused by ____________. (Check all that apply .)
A. a decrease in the government's budget deficit. B. an elevated perception on the part of households
that the future may hold many "rainy days." C. a heightened desire on the part of firms to internally
fund their future activities. .D. an increase in the nominal rate of interest adjusted for inflation. E. an
aging population that is ill-prepared for retirement.
Answer: an elevated perception on the part of households that the future may hold many "rainy days." a
heightened desire on the part of firms to internally fund their future activities. an aging population that is
ill-prepared for retirement.
Question 6: What is the equation for real interest rate, r?
Answer: r = i - pi where i = nominal interest rate and pi = rate of inflation
Question 7: f the economy experiences an unexpectedly high rate of inflation, the group that would tend
to benefit is ___________. A. debtors (people or businesses who owe money). .B. creditors (people or
institutions that are owed money). C. both would benefit equally. D. neither benefits.
Answer: debtors
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, Question 8: How is the rate of inflation related to the nominal interest rate that credit card companies
charge, and why would lenders need to increase the nominal interest rate when the inflation rate
increases? A. The nominal rate of interest is the real rate of interest plus the rate of inflation; lenders
need to raise the nominal rate when inflation increases to stabilize credit market activity. B. The
nominal rate of interest is the real rate of interest plus the rate of inflation; lenders need to raise the
nominal rate when inflation increases to maintain their desired real return. C. The nominal rate of
interest is the real rate of interest less the rate of inflation; lenders need to raise the nominal rate when
inflation increases to maintain their desired real return. D. The nominal rate of interest and the
inflation rate are inversely related; lenders need to raise the nominal rate when inflation increases to
satisfy government regulations on lending practices.
Answer: The nominal rate of interest is the real rate of interest plus the rate of inflation; lenders need to raise
the nominal rate when inflation increases to maintain their desired real return.
Question 9: Why would credit card companies move to states without usury laws during a period of
high inflation, like the 1970s? A. Because states with usury law ceilings give rise to credit shortages
during periods of high inflation, lenders have an incentive to move to states without such laws. B. By
moving to states without usury laws, lenders can guarantee themselves a profit during inflationary
periods. C. Because usury law ceilings may limit the real return lenders can earn during inflationary
periods, lenders have an incentive to move to states without such laws. D. Because states with usury law
ceilings force lenders to charge negative real rates, lenders have an incentive to move to states without
such laws.
Answer: C. Because usury law ceilings may limit the real return lenders can earn during inflationary
periods, lenders have an incentive to move to states without such laws.
Question 10: Which of the following cannot produce a shift in the credit supply curve? A. A change in
household saving motives. B. A change in firms' retained earnings. C. A change in the real interest rate.
D. All of the above.
Answer: C. A change in the real interest rate.
Question 11: From each of the two lists select the categories that are appropriate to each side of the
balance sheet. Assets Liabilities and Stockholders' Equity A. Cash equivalents B. Demand deposits C.
Long-term debt D. Stockholders' equity E. Short-term borrowing F. Long-term investments G.
Reserves A. Short-term borrowing B. Long-term debt C. Demand deposits D. Reserves E. Long-term
investments F. Stockholders' equity G. Cash equivalents
Answer: Assets: Reserves, long term investments, cash equivalents Liabilities and Stockholders' Equities:
Long-term debt, stockholders' equity, demand deposits, short-term borrowing
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Question 1: What is the difference between nominal and real interest rates?
Answer: The real interest rate is the nominal interest rate adjusted for inflation. The nominal interest rate is
the rate you pay on a loan
Question 2: The credit demand curve slopes downward because ____________.
Answer: a lower real interest rate raises a borrowing firm's profit and hence its willingness to borrow.
Question 3: A shift in the credit demand curve can be caused by ___________.
Answer: A. changes in perceived business opportunities for firms. B. changes in government policy. C.
changes in household preferences or expectations.
Question 4: What are some factors that explain why people save for the future? (Check all that apply .)
Answer: C. People save to invest in a personal business. D. People save for retirement. .E. People save for
their children.
Question 5: A shift in the credit supply curve can be caused by ____________. (Check all that apply .)
A. a decrease in the government's budget deficit. B. an elevated perception on the part of households
that the future may hold many "rainy days." C. a heightened desire on the part of firms to internally
fund their future activities. .D. an increase in the nominal rate of interest adjusted for inflation. E. an
aging population that is ill-prepared for retirement.
Answer: an elevated perception on the part of households that the future may hold many "rainy days." a
heightened desire on the part of firms to internally fund their future activities. an aging population that is
ill-prepared for retirement.
Question 6: What is the equation for real interest rate, r?
Answer: r = i - pi where i = nominal interest rate and pi = rate of inflation
Question 7: f the economy experiences an unexpectedly high rate of inflation, the group that would tend
to benefit is ___________. A. debtors (people or businesses who owe money). .B. creditors (people or
institutions that are owed money). C. both would benefit equally. D. neither benefits.
Answer: debtors
Page 1
, Question 8: How is the rate of inflation related to the nominal interest rate that credit card companies
charge, and why would lenders need to increase the nominal interest rate when the inflation rate
increases? A. The nominal rate of interest is the real rate of interest plus the rate of inflation; lenders
need to raise the nominal rate when inflation increases to stabilize credit market activity. B. The
nominal rate of interest is the real rate of interest plus the rate of inflation; lenders need to raise the
nominal rate when inflation increases to maintain their desired real return. C. The nominal rate of
interest is the real rate of interest less the rate of inflation; lenders need to raise the nominal rate when
inflation increases to maintain their desired real return. D. The nominal rate of interest and the
inflation rate are inversely related; lenders need to raise the nominal rate when inflation increases to
satisfy government regulations on lending practices.
Answer: The nominal rate of interest is the real rate of interest plus the rate of inflation; lenders need to raise
the nominal rate when inflation increases to maintain their desired real return.
Question 9: Why would credit card companies move to states without usury laws during a period of
high inflation, like the 1970s? A. Because states with usury law ceilings give rise to credit shortages
during periods of high inflation, lenders have an incentive to move to states without such laws. B. By
moving to states without usury laws, lenders can guarantee themselves a profit during inflationary
periods. C. Because usury law ceilings may limit the real return lenders can earn during inflationary
periods, lenders have an incentive to move to states without such laws. D. Because states with usury law
ceilings force lenders to charge negative real rates, lenders have an incentive to move to states without
such laws.
Answer: C. Because usury law ceilings may limit the real return lenders can earn during inflationary
periods, lenders have an incentive to move to states without such laws.
Question 10: Which of the following cannot produce a shift in the credit supply curve? A. A change in
household saving motives. B. A change in firms' retained earnings. C. A change in the real interest rate.
D. All of the above.
Answer: C. A change in the real interest rate.
Question 11: From each of the two lists select the categories that are appropriate to each side of the
balance sheet. Assets Liabilities and Stockholders' Equity A. Cash equivalents B. Demand deposits C.
Long-term debt D. Stockholders' equity E. Short-term borrowing F. Long-term investments G.
Reserves A. Short-term borrowing B. Long-term debt C. Demand deposits D. Reserves E. Long-term
investments F. Stockholders' equity G. Cash equivalents
Answer: Assets: Reserves, long term investments, cash equivalents Liabilities and Stockholders' Equities:
Long-term debt, stockholders' equity, demand deposits, short-term borrowing
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