In the 1970s, nominal interest rates in the United States were quite high, while real rates were extremely low
Which group "wins" in this circumstance, lenders or borrowers? What might explain the willingness of the "losers" to accept disadvantageous loan terms?
Borrowers "win" when the real interest rate is low. The lenders' "generosity" is mostly because lending terms are based on expected inflation. If actual inflation turns out to be higher than expected, the real cost of borrowing is lower than had been expected. Also, most loans are made by financial institutions that are in the business of "selling" money. When expected inflation is high, some lenders might try to attract borrowers by offering a nominal interest rate that does not compensate fully for the expected inflation. That is, the lender accepts a lower real interest rate in order to increase its loan business.
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Which of the following are included in the M2 definition of money?
A) currency outside of banks and checkable deposits B) currency outside of banks and credit lines on credit cards C) time deposits and the value of prime grade bonds D) currency both inside and outside of banks E) currency inside of banks and banks' reserves
Which of the following is the best example of "depreciation"?
A) An individual worker becoming tired at the end of an eight-hour work day. B) The notion that individuals obtain less utility from paying taxes than giving to charities. C) A truck used by a pizzeria to make deliveries is worth less at the end of one year. D) A rise in prices depreciating the value of consumers' real incomes.
The choice between futures and options
A) depends on whether the underlying instrument is a debt instrument or an equity. B) reflects a trade-off between the higher cost of using options and the extra insurance benefits that options provide. C) reflects a trade-off between the higher cost of using futures and the extra insurance benefits that futures provide. D) reflects a trade-off between the greater risk from using options and the extra insurance benefits that options provide.
Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million.To Mexico, the payoff to cheating is either:
A. $150 million or $200 million. B. $100 million or $110 million. C. $60 million or $100 million. D. $80 million or $110 million.