Q: Suppose you borrow $$2,000 today and agree to repay it in one year with an additional 160 as $$interest. What is the annual interest rate?

$$ \frac{160}{2000} \times 100\% = 8\% $$

Question 1

Which of the following best describes 'net wealth' as discussed in the credit market module?

Accepted Answer

The total value of all real and financial assets an individual owns, minus their liabilities.

Question 2

Suppose you borrow $$2,000 today and agree to repay it in one year with an additional 160 as $$interest. What is the annual interest rate?

Accepted Answer

$$ \frac{160}{2000} 	imes 100\% = 8\% $$

Question 3

If the nominal interest rate is 6% and the expected inflation rate is 2%, what is the real interest rate according to the Fisher equation?

Accepted Answer

$$ r = i - \pi^e = 6\% - 2\% = 4\% $$

Question 4

Which of the following is NOT included in the credit (loanable funds) market?

Accepted Answer

Stock market transactions

Question 5

A decrease in the real interest rate is most likely to result in which of the following changes in the economy?

Accepted Answer

An increase in both consumption and investment

Question 6

If the market value of your assets rises, but your liabilities remain unchanged, what happens to your net wealth?

Accepted Answer

Your net wealth increases due to capital gains.

Question 7

Which of the following best explains why $$1 received in the future is worth less than 1 $$today?

Accepted Answer

Because the interest rate is generally greater than zero, so money today can earn interest.

Question 8

A bond is best described as:

Accepted Answer

A debt security obligating the issuer to repay principal and make periodic interest payments.

Question 9

If the expected inflation rate rises while the real interest rate remains constant, what will happen to the nominal interest rate?

Accepted Answer

It will increase by the same amount as the increase in expected inflation.

Question 10

Which of the following is a plausible reason why riskier loans have higher interest rates?

Accepted Answer

Lenders require a premium to compensate for the higher probability of default.

Question 11

Suppose the nominal interest rate on a loan is 7% and the actual inflation rate turns out to be 10%. Who benefits from this unexpected inflation?

Accepted Answer

Borrowers benefit, lenders are hurt.

Question 12

Which of the following is an example of a capital gain?

Accepted Answer

The market value of your house increases.

Question 13

If you want to receive $1,000 in two years and the annual interest rate is 4%, how much do you need to deposit today? (Use the present value formula.)

Accepted Answer

$$ PV = \frac{1000}{(1+0.04)^2$} = \frac{1000}{1.0816} \approx 924.56 $$

Question 14

Which of the following is NOT a type of financial risk discussed in the module?

Accepted Answer

Production risk

Question 15

What happens to the price of existing bonds when market interest rates increase?

Accepted Answer

Bond prices decrease.

Question 16

Which of the following best describes the supply of loanable funds in the credit market?

Accepted Answer

The relationship between the quantity of loanable funds supplied and the real interest rate, holding other influences constant.

Question 17

A government issues a bond with a principal of $$10,000 and annual coupon payments of 500. $$What is the coupon rate?

Accepted Answer

$$ \frac{500}{10000} 	imes 100\% = 5\% $$

Question 18

Which of the following statements about financial assets is correct?

Accepted Answer

Stocks are direct claims of ownership, while bonds are debt contracts.

Question 19

If a bank faces a sudden withdrawal of large deposits and must sell loans at a loss to raise cash, this is an example of:

Accepted Answer

Liquidity risk

Question 20

Which of the following would shift the demand for loanable funds in the credit market?

Accepted Answer

A change in perceived business opportunities

Credit Market and Interest Rates: Principles of Macroeconomics Study Notes

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