Question

32. Assume the Fisher Hypothesis is correct and the expected inflation rate rises by one percentage point. This causes

A. an increase in the real interest rate of one percentage point.
B. a decrease in the real interest rate of one percentage point.
C. an increase in the nominal interest rate of one percentage point.

D. a decrease in the nominal interest rate of one percentage point.

E. no change in the nominal or real interest rate.

33. What makes one asset riskier than another?
A. Riskier assets have lower expected returns than safer assets.
B. Riskier assets have lower standard deviations of returns, given expected returns.
C. Markets price risker assets higher.
D. Riskier assets have higher standard deviations of returns, given an expected return.

34. Tess is considering purchasing a car. She can afford a payment of $250 per month. While contemplating her purchase, the yield to maturity on a car loan rises. This means

A. Tess can afford a more expensive car.
B. Tess must purchase a cheaper car.
C. the most Tess can spend on a car does not change.
D. the yield to maturity and the amount Tess can spend are not related.

Answer 1

32) nominal interest rate is the sum of real interest rate and expected inflation. If expected inflation increases by one percentage point, real interest rate should decrease by 1 percentage point. So that nominal interest rate remains unchanged. Option B

33) when there is a risky asset, the rate of return is higher but at the same time there is an increased risk which is measured by standard deviation or variance. Option D

34) because there is an increase in the yield to maturity on the loan, Tess will now have to pay a higher monthly payment to purchase the same car. If you can afford only 250 dollars then he should perhaps purchase a cheaper car. Option B.