$$\text{Stockholders' equity} = \text{Total assets} - \text{Total liabilities}$$

Question 1

Suppose you borrow $10,000 at a nominal interest rate of 6% for one year. What will be your total interest payment?

Accepted Answer

$600

Question 2

If the nominal interest rate is 8% and the inflation rate is 3%, what is the real interest rate according to the Fisher Equation?

Accepted Answer

$$r = i - \pi = 8\% - 3\% = 5\%$$

Question 3

Why do individuals and businesses base their borrowing decisions on the real interest rate rather than the nominal interest rate?

Accepted Answer

Because the real interest rate adjusts for inflation, reflecting the true cost of borrowing.

Question 4

Which of the following would cause the credit demand curve to shift to the right?

Accepted Answer

Firms buying more capital equipment.

Question 5

What does a relatively steep credit demand curve imply?

Accepted Answer

Borrowers are less sensitive to changes in the real interest rate.

Question 6

If the real interest rate increases, what is the most likely effect on the quantity of credit supplied?

Accepted Answer

The quantity of credit supplied will increase.

Question 7

Which of the following is NOT a reason people save?

Accepted Answer

To increase current consumption.

Question 8

If households become nervous about their jobs, what is the likely effect on the credit supply curve?

Accepted Answer

The credit supply curve will shift to the left.

Question 9

What determines the equilibrium real interest rate in the credit market?

Accepted Answer

The intersection of the credit supply and credit demand curves.

Question 10

If the U.S. federal government increases its budget deficit, what is the likely effect on the credit market?

Accepted Answer

The credit demand curve shifts right, increasing the real interest rate.

Question 11

What is the formula for stockholders’ equity on a bank’s balance sheet?

Accepted Answer

$$	ext{Stockholders' equity} = 	ext{Total assets} - 	ext{Total liabilities}$$

Question 12

Which of the following is NOT a function performed by banks as financial intermediaries?

Accepted Answer

Setting government fiscal policy.

Question 13

What is maturity transformation in banking?

Accepted Answer

Converting short-term liabilities into long-term investments.

Question 14

During a severe financial crisis, who ultimately absorbs the risk if a bank becomes insolvent?

Accepted Answer

The FDIC and U.S. taxpayers.

Question 15

What happens to a bank’s balance sheet if it suffers a 30% reduction in the value of its long-term assets?

Accepted Answer

Stockholders’ equity becomes negative and the bank is insolvent.

Question 16

Which of the following best describes a bank run?

Accepted Answer

A large number of depositors withdraw their funds simultaneously due to concerns about the bank’s liquidity.

Question 17

Which historical event led to the regulation of Systemically Important Financial Institutions (SIFIs) in the U.S.?

Accepted Answer

The collapse of Lehman Brothers during the 2007–2009 financial crisis.

Question 18

If Apple and other firms retain more earnings, what is the likely effect on the credit supply curve?

Accepted Answer

The credit supply curve will shift to the right.

Question 19

Which equation best represents the real return on savings if there are no credit markets and inflation is positive?

Accepted Answer

$$r = 0 - \pi = -\pi$$

Credit Markets and Financial Intermediation: Study Notes for Macroeconomics

Study Guide - Practice Questions