# Suppose the nominal interest rate is going to be 10% per year

QUESTION 1Suppose the nominal interest rate is going to be 10% per year for the next two years. The present discounted value of $500 to be received in two years is:$480.00$490.00$350.00$413.22$454.45QUESTION 2An increase in consumer confidence will cause:the neutral or medium-run real interest rate to risethe neutral real interest rate to fallambiguous effects on the natural real interest rateno effect on the neutral real interest rateQUESTION 3One reason that long-term interest rates change less than short-term rates is that:the mathematical calculations are more difficult for analysts in the case of long-term bondslong-term rates are always lower than short-term rates, so there is less room for them to changefinancial markets assume that, in the future, the central bank will reverse part of any change in short-term ratesfinancial markets assume that the central bank will be passive as interest rates rise or fallfinancial markets are often swept up by bubbles and fadsQUESTION 4In the short run, higher money growth is associated with:lower real interest rates and lower nominal interest rateslower real interest rates and higher nominal interest rateshigher real interest rates and higher nominal interest rateshigher real interest rates and lower nominal interest ratesnone of the aboveQUESTION 6If the nominal interest rate falls, and the expected inflation rate rises, then the real interest rate:must risemust fallcannot be definedwill rise, but only if the drop in the nominal rate is greater than the increase in expected inflationwill fall, but only if the drop in the nominal rate is smaller than the increase in expected inflationQUESTION 7Assuming the nominal interest rate is greater than 0, rank the following three sequences of payments according to their present value:Sequence “A”: $90, $100, $110Sequence “B”: $100, $100, $100Sequence “C”: $110, $100, $90A > B > CA > C > BC > B > AC > A > BB > A > CQUESTION 8Assume that the rate of depreciation is 10% per year, the population growth rate is 3% per year, and the growth rate of technology is 1% per year. Then the level of investment needed to maintain a constant capital stock (K) in this economy is:0.01K0.03K0.04K0.10K0.14KQUESTION 9Suppose the production function is represented by the following: Y = F(K, AN). Given this production function, constant returns to scale means that output will increase by 10% when:K or AN increase by 10%K and N increase by 10%N or A increase by 10%N and A increase by 10%all of the aboveQUESTION 12If the nominal interest rate is zero, then the present discounted value of a sequence of future payments is:zeroundefinedequal to the last of the paymentsequal to the sum of all paymentsequal to the square of the sum of all paymentsQUESTION 13Suppose there is an increase in the saving rate. We know that this will cause an increase in which of the following in the steady state?growth rate of outputlevel of outputgrowth rate of capital per workergrowth rate of output per effective workernone of the aboveQUESTION 14For this question, ignore differences in risk between different bonds. If there is arbitrage between one-year bonds and two-year bonds, we know that the rate of return on one-year bonds:must be identical to the expected rate of return from holding a two-year bond for one yearmust be identical to the expected rate of return from holding a two-year bond for two yearsmust be larger than the expected rate of return from holding a two-year bond for one yearmust be smaller than the expected rate of return from holding a two-year bond for one yearwill be exactly half the rate of return on two-year bondsQUESTION 16Suppose the current one-year interest rate is 2%, and financial markets expect the one-year interest rate next year to be 6%. Given this information, the yield to maturity on a two-year bond will be approximately:4%6.66%7.5%8%10%QUESTION 18Assume that the rate of depreciation is 10% per year, the population growth rate is 3% per year, and the growth rate of technology is 1% per year. Then the steady-state growth rate of output per worker in this economy is:1%3%4%10%14%QUESTION 19Which of the following will increase the steady-state growth rate of capital?an increase in the saving ratean increase in the population growth ratea temporary increase in technological progressall of the abovenone of the aboveQUESTION 20Contractionary monetary policy tends to cause:lower nominal interest rates (i) in the medium run and no change in real interest rates (r) in the medium runno change in i in the medium run and a reduction in r in the medium runno change in i in the medium run and an increase in r in the medium runan increase in i in the medium run and no change in r in the medium run