Understanding Interest Rates

What is the best way to think of interest rates?

• As the rate of inflation

• As the value of stocks

• As the cost of living

• As the price of money

What does a 5% interest rate on a $100 loan mean?

• A $5 interest payment on a $100 loan for one year

• A $10 interest payment on a $100 loan for one year

• A $5 interest payment on a $50 loan for one year

• A $10 interest payment on a $50 loan for one year

What is the most important factor in determining why interest rates change?

• The price of gold

• The supply of funds available from lenders and the demand from borrowers

• The level of government debt

• The stock market performance

What happens to mortgage rates if the demand for mortgage borrowing becomes higher than the available funds?

• Mortgage rates will go up

• Mortgage rates will go down

• Mortgage rates will be eliminated

• Mortgage rates will stay the same

What is fiscal policy?

• The way banks set their interest rates

• The way governments spend their money and finance their endeavors

• The way companies invest in stocks

• The way consumers save their money

What is the effect of a high level of government expenditure and borrowing?

• It increases the supply of money

• It lowers the interest rates

• It reduces the demand for capital

• It makes it hard for companies and individuals to borrow

What does it mean when monetary policy is 'loosened'?

• The government has created more money

• The government has reduced taxes

• The government has decreased spending

• The government has increased interest rates

What is the effect of a 'tightened' monetary policy?

• Interest rates rise

• Interest rates fall

• Inflation increases

• Inflation decreases

Why do investors demand higher interest rates during high inflation?

• To lower the risk of default

• To reduce their savings

• To increase their spending

• To preserve their purchasing power

What is the 'Net Interest Margin' (NIM) for a bank?

• The interest rate set by the central bank

• The difference between the interest paid to depositors and the interest charged to borrowers

• The total amount of deposits in the bank

• The total amount of loans given by the bank