Question Details

Why have higher interest rates not led to a fall in borrowing



1. "The Franklin Savings bonds will carry a 3 percentage point premium over inflation. This deal takes the uncertainty out of the inflation component." An investor will be better off buying this bond (rather than a regular bond) if the current market expectation of inflation is 
a) accurate b) an overestimate 
c) an underestimate d) it doesn't matter - an investor is guaranteed to be better off 
2. "As a result, interest rates, which particularly affect certain sectors (capital spending, houses, and cars) are raised to levels which were previously viewed as impossible. But clearly, they aren't out of line with what the central bank views as appropriate." Interest rates could rise to such high levels because of 
a) high inflation expectations b) huge central bank bond sales 
c) large increases in the price of bonds d) the central bank following a monetarist rule 
3. "Moreover, contrary to the central bank's pronouncements, higher interest rates have not caused everyone to borrow less. Most people are borrowing as much as ever - or more - to buy goods now." Why have higher interest rates not led to a fall in borrowing, as standard economic theory suggests should happen? 
a) current price levels are very low b) unemployment is particularly low 
c) real interest rates are in fact very low d) nominal interest rates are in fact very low 
4. "When you look at real interest rates, they're way too high, probably because most people are still determining whether low inflation is a long-term reality." Real interest rates are high because 
a) the Fed has printed too much money b) the Fed has failed in its fight against inflation 
c) inflation expectations are lower than actual inflation 
d) inflation expectations are higher than actual inflation 
5. "A decline in the rate of inflation is the one sure route to lower interest rates, the central bank told us two years ago. Inflation is now only about one-third of what it was two years ago, but interest rates are higher. How come?" The promised results have not materialized because 
a) the demand for money has fallen b) the supply of money has increased 
c) inflation expectations have not fallen d) interest rates and inflation are not connected



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