Lec11 iC Questions

Question 1

The Bank of Canada chooses to lower the “overnight rate”, reducing short-term interest rates. What is the effect on consumption and investment?

a) Consumption decreases, investment decreases
b) Consumption increases, investment decreases
c) Consumption decreases, investment increases
d) Consumption increases, investment increases
e) None of the above

Answer 1

d) Consumption increases, investment increases

Question 2

Consider the market for loanable funds. In the long-run, if household savings increases, what will happen to real interest rates and the quantity of investment?

a) Interest rates fall, and investment is reduced
b) Interest rates rise, and investment is reduced
c) Interest rates fall, and investment is increased
d) Interest rates rise, and investment is reduced
e) None of the above

Answer 2

c) Interest rates fall, and investment is increased

Question 3

Which of the following counts as money in Canada?

a) Gold
b) Bitcoin
c) The U.S. Dollar
d) The Euro
e) Deposits in your bank account

Answer 3

e) Deposits in your bank account

Question 4

A bond will pay back $10,000 in 10 years. The interest rate is initially 3%. What is the present value of this bond?
(Answer to the nearest dollar)

Answer 4

PV = FV/(1+r)^t
PV = 10000/(1.03)^10
PV = 7441

Question 5

A bond will pay back $10,000 in 10 years. The interest rate is initially 3%. If the interest rate rises to 5%, how much does the present value of the bond change?
(Answer to the nearest dollar, record increases as positive, decreases as negative)

Answer 5

PV (r = 3%) = FV/(1+r)^t
PV = 10000/(1.03)^10
PV = 7441

PV (r = 5%) = FV/(1+r)^t
PV = 10000/(1.05)^10
PV = 6139

6139 - 7441
= -1302