Question

1. Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly.

a. The nominal interest rate is measured in terms of goods; the real interest rate is measured in terms of money.

b. As long as expected inflation remains roughly constant, the movements in the real interest rate are roughly equal to the movements in the nominal interest rate.

c. The nominal policy interest rate was at the zero lower bound in the United States in 2013.

d. When expected inflation increases, the real rate of interest falls. 


e. All bonds have equal risk of default and thus pay equal rates of interest. 


f. The nominal policy interest rate is set by the central bank.

Answer 1

a) False

its the nominal interest rate that is measured in terms of money and the real interest rate is measured in terms of goods.

b) True

As real interest rate is the difference between the expected inflation and nominal interest rate.

c) True

As the US was just coming out of the subprime crisis. the interest rate was 0.25.

d) True

As real interest rate is the difference between the expected inflation and nominal interest rate. the higher the expected inflation rate the lower the real interest rate in the market.

e) false

Bonds are graded as per the risk involved and there are many different varieties of them.

f) True

Its the Fed that sets the nominal policy interest rates.