Econ 252 Exam 2 Questions with Correct Answers (Grade A+)
Question 1: What is the difference between nominal and real interest rates?
Answer: The nominal interest rate is the rate you pay on a loan and the real interest rate is the nominal
interest rate adjusted for inflation
Question 2: Firms, households, and governments use the credit markets for borrowing. The credit
demand curve shows the relationship between the quantity of credit demanded and the real interest
rates The credit demand curve slopes downward because?
Answer: a higher real interest rate reduces a borrowing firms profit and hence its willingness to borrow
Question 3: Firms, households, and governments use the credit markets for borrowing. The credit
demand curve shows the relationship between the quantity of credit demanded and the real interest
rates A shift in the credit demand curve can be caused by?
Answer: -Changes in household preferences or expectations
-changes in perceived business opportunities for firms changes in government policy
Question 4: What are some factors that explain why people save for the future?
Answer: -People save to invest in personal business
-people save for their children
-people save for their retirement
Question 5: The credit supply curve slopes upward because a?
Answer: -higher real interest rate encourages more saving
-higher real interest rate discourages current consumption
Question 6: A shift in the credit supply curve can be caused by?
Answer: -An aging population that is ill-prepared for retirement
-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
Question 7: If the economy experiences an unexpectedly high rate of inflation, the group that would
tend to benefit is?
Answer: Debtors(people or business who owe the money)
Page 1
, Question 8: how is the rate of inflation related to nominal interest rate that credit card companies
charge, and why would lenders need to increase the nominal interest rate when the inflation rate
increases?
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?
Answer: 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: What can produce a movement along the credit supply curve?
Answer: A change in the real interest rate
Question 11: List assets on a bank balance sheet
Answer: -cash equivalents
-reserves
-long term investments
Question 12: list of Liabilities and stockholders equity on a balance sheet
Answer: -stockholders equity
-long term debt
-demand deposits
-short term borrowing
Question 13: What is stockholders equity?
Answer: The difference between a banks total assets and total liabilities
Question 14: Who bears the risk that a bank faces when stockholders equity is greater than zero?
Answer: the banks stockholders
Question 15: What is usually true of a households balance sheet?
Answer: Assets and liabilities will not necessarily be equal because many households face large debts and
their liabilities are greater than their assets
Question 16: Which of the following assets is an average household likely to hold?
Answer: Cash, retirement accounts, and equities
Page 2
Question 1: What is the difference between nominal and real interest rates?
Answer: The nominal interest rate is the rate you pay on a loan and the real interest rate is the nominal
interest rate adjusted for inflation
Question 2: Firms, households, and governments use the credit markets for borrowing. The credit
demand curve shows the relationship between the quantity of credit demanded and the real interest
rates The credit demand curve slopes downward because?
Answer: a higher real interest rate reduces a borrowing firms profit and hence its willingness to borrow
Question 3: Firms, households, and governments use the credit markets for borrowing. The credit
demand curve shows the relationship between the quantity of credit demanded and the real interest
rates A shift in the credit demand curve can be caused by?
Answer: -Changes in household preferences or expectations
-changes in perceived business opportunities for firms changes in government policy
Question 4: What are some factors that explain why people save for the future?
Answer: -People save to invest in personal business
-people save for their children
-people save for their retirement
Question 5: The credit supply curve slopes upward because a?
Answer: -higher real interest rate encourages more saving
-higher real interest rate discourages current consumption
Question 6: A shift in the credit supply curve can be caused by?
Answer: -An aging population that is ill-prepared for retirement
-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
Question 7: If the economy experiences an unexpectedly high rate of inflation, the group that would
tend to benefit is?
Answer: Debtors(people or business who owe the money)
Page 1
, Question 8: how is the rate of inflation related to nominal interest rate that credit card companies
charge, and why would lenders need to increase the nominal interest rate when the inflation rate
increases?
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?
Answer: 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: What can produce a movement along the credit supply curve?
Answer: A change in the real interest rate
Question 11: List assets on a bank balance sheet
Answer: -cash equivalents
-reserves
-long term investments
Question 12: list of Liabilities and stockholders equity on a balance sheet
Answer: -stockholders equity
-long term debt
-demand deposits
-short term borrowing
Question 13: What is stockholders equity?
Answer: The difference between a banks total assets and total liabilities
Question 14: Who bears the risk that a bank faces when stockholders equity is greater than zero?
Answer: the banks stockholders
Question 15: What is usually true of a households balance sheet?
Answer: Assets and liabilities will not necessarily be equal because many households face large debts and
their liabilities are greater than their assets
Question 16: Which of the following assets is an average household likely to hold?
Answer: Cash, retirement accounts, and equities
Page 2
