A home buyer is presented with two options for financing the purchase of a home: a 20 year fixed rate mortgage or a 20 year adjustable-rate mortgage, where the rate adjusts once a year. Which mortgage would you expect to start at the lowest interest rate and why?
What will be an ideal response?
The adjustable-rate mortgage should start at a lower interest rate. In the case of an adjustable-rate mortgage, the lender is able to transfer a significant amount of the interest-rate risk to the borrower. But as we saw in a previous chapter, most people are risk averse and in order to take on increased risk the individual requires compensation. Here the borrower is enticed to take on the interest-rate risk with the compensation in the form of a lower starting interest rate on the mortgage.
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All of the following explain the downward slope of the aggregate demand curve EXCEPT
A) changes in the stock of real wealth held by individuals. B) the effect of changing interest rates on the quantity demanded of interest-rate-sensitive goods. C) the availability of foreign substitute goods. D) the presence of unused production capacity and unemployment.
Under the gold standard, if a country had a deficit in its balance of payments, it would have to:
A. sell gold in order to keep the value of its currency from rising. B. buy gold in order to keep the value of its currency from rising. C. sell gold in order to keep the value of its currency from falling. D. buy gold in order to keep the value of its currency from falling.
Suppose that a price discriminating monopolist is able to divide its market into two groups. If the firm sells its product for $50 to the group whose customers have the most elastic demand, what price are they likely to charge to the group whose customers have the least elastic demand?
A. $50 B. more than $50 C. less than $50 D. The answer depends on the marginal revenue for that group.
If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios best reflects the change a representative firm experiences as the market adjusts to its long-run equilibrium?
A) Demand decreases and becomes less elastic. B) Demand decreases and becomes more elastic. C) Demand increases and becomes less elastic. D) Demand increases and becomes more elastic.