Q1. Which of the following is least likely to result from an increase in the rate of growth in the money supply?

A)    Higher actual inflation.

B)    A higher nominal risk-free rate.

C)    A higher real risk-free rate.

Q2. Two economists, Pearl Millidge and Byron Forrest, are discussing theories that explain why increased inflation causes nominal interest rates to rise. They offer the following explanations:

Millidge: Because businesses expect higher prices for their output in the future, they will expect a greater return on their investments and will increase their demand for financial capital, which will drive interest rates higher.

Forrest: Savers expect to pay higher prices for goods and services in the future, so they will be less willing to trade current consumption for future consumption and will therefore supply less financial capital, so interest rates increase.

Are these explanations CORRECT?

          Millidge                                   Forrest

A) Incorrect                                     Correct

B) Correct                                       Incorrect

C) Correct                                       Correct

Q3. If market participants come to believe that the expected inflation rate embedded in the current nominal risk-free rate of interest is less than will actually occur, this will have the effect of:

A)    increasing demand for funds and decreasing the supply until the nominal risk-free rate decreases to reflect the new expectations.

B)    increasing demand for funds and decreasing the supply until the nominal risk-free rate increases to reflect the new expectations.

C)    decreasing demand for funds and increasing the supply until the nominal risk-free rate increases to reflect the new expectations.

Q4. The nominal risk-free rate of interest equals the real risk-free rate:

A)    plus actual inflation.

B)    minus expected inflation.

C)    plus expected inflation.

答案和详解如下：

Q1. Which of the following is least likely to result from an increase in the rate of growth in the money supply?

A)    Higher actual inflation.

B)    A higher nominal risk-free rate.

C)    A higher real risk-free rate.

Correct answer is C)

The real risk-free rate is independent of changes in the growth of the money supply. Both remaining items are consistent with an increase in the growth rate of the money supply.

Q2. Two economists, Pearl Millidge and Byron Forrest, are discussing theories that explain why increased inflation causes nominal interest rates to rise. They offer the following explanations:

Millidge: Because businesses expect higher prices for their output in the future, they will expect a greater return on their investments and will increase their demand for financial capital, which will drive interest rates higher.

Forrest: Savers expect to pay higher prices for goods and services in the future, so they will be less willing to trade current consumption for future consumption and will therefore supply less financial capital, so interest rates increase.

Are these explanations CORRECT?

          Millidge                                   Forrest

A) Incorrect                                     Correct

B) Correct                                       Incorrect

C) Correct                                       Correct

Correct answer is C)

Both explanations are correct. Higher inflation results in increased demand for financial capital and decreased supply of financial capital. Both cause nominal interest rates to increase.

Q3. If market participants come to believe that the expected inflation rate embedded in the current nominal risk-free rate of interest is less than will actually occur, this will have the effect of:

A)    increasing demand for funds and decreasing the supply until the nominal risk-free rate decreases to reflect the new expectations.

B)    increasing demand for funds and decreasing the supply until the nominal risk-free rate increases to reflect the new expectations.

C)    decreasing demand for funds and increasing the supply until the nominal risk-free rate increases to reflect the new expectations.

Correct answer is B)         

If market participants come to believe that actual inflation will be greater than the expected inflation premium embedded in the nominal risk-free rate, the demand for financial capital will increase, the supply will decrease, and, eventually, the nominal risk-free rate will increase to reflect the new expectations.

Q4. The nominal risk-free rate of interest equals the real risk-free rate:

A)    plus actual inflation.

B)    minus expected inflation.

C)    plus expected inflation.

Correct answer is C)

The nominal risk-free rate of interest (i.e., that which is observed as the required rate of return on T-bills) equals the real risk-free rate plus expected inflation.

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