Firms require capital to invest in productive opportunities. The best firms with the most profitable opportunities can attract capital away from inefficient firms with less profitable opportunities. Investors supply firms with capital at a cost called the interest rate. The interest rate that investors require is determined by several factors, including the availability of production opportunities, the time preference for current consumption, risk, and inflation. Suppose the Federal Reserve (the Fed) decides to tighten credit by contracting the money supply. Use the following graph by moving the black X to show what happens to the equilibrium level of borrowing and the new equilibrium interest rate. S2 S1 16 D Equilibrium INTEREST RATE, r (Percent) CAPITAL (Billions of dollars) Which tend to be more volatile, short- or long-term interest rates? Long-term interest rates Short-term interest rates If the inflation rate was 3.00% and the nominal interest rate was 4.60% over the last year, what was the real rate of interest over the last year? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. Round intermediate calculations to four decimal places. O 1.84% O 1.36% 2.00% O 1.60% INI
Firms require capital to invest in productive opportunities. The best firms with the most profitable opportunities can attract capital away from inefficient firms with less profitable opportunities. Investors supply firms with capital at a cost called the interest rate. The interest rate that investors require is determined by several factors, including the availability of production opportunities, the time preference for current consumption, risk, and inflation. Suppose the Federal Reserve (the Fed) decides to tighten credit by contracting the money supply. Use the following graph by moving the black X to show what happens to the equilibrium level of borrowing and the new equilibrium interest rate. S2 S1 16 D Equilibrium INTEREST RATE, r (Percent) CAPITAL (Billions of dollars) Which tend to be more volatile, short- or long-term interest rates? Long-term interest rates Short-term interest rates If the inflation rate was 3.00% and the nominal interest rate was 4.60% over the last year, what was the real rate of interest over the last year? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. Round intermediate calculations to four decimal places. O 1.84% O 1.36% 2.00% O 1.60% INI
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Firms require capital to invest in productive opportunities. The best firms with the most profitable opportunities can attract capital away from
inefficient firms with less profitable opportunities. Investors supply firms with capital at a cost called the interest rate. The interest rate that investors
require is determined by several factors, including the availability of production opportunities, the time preference for current consumption, risk, and
inflation.
Suppose the Federal Reserve (the Fed) decides to tighten credit by contracting the money supply. Use the following graph by moving the black X to
show what happens to the equilibrium level of borrowing and the new equilibrium interest rate.
S2
S1
16
D
Equilibrium
INTEREST RATE, r (Percent)
Transcribed Image Text:CAPITAL (Billions of dollars)
Which tend to be more volatile, short- or long-term interest rates?
Long-term interest rates
Short-term interest rates
If the inflation rate was 3.00% and the nominal interest rate was 4.60% over the last year, what was the real rate of interest over the last year?
Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. Round intermediate calculations to four decimal places.
O 1.84%
O 1.36%
2.00%
O 1.60%
INI
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