Chapter 6 (Exam 2)

Front 1

What four factors affect the level of interest rates?

Back 1

production opportunities, time preference for consumption, risk, and expected inflation.

Front 2

When operations go up, what happens to rates?

Back 2

rates go up

Front 3

When production opportunities are better, businesses are able to what?

Back 3

are made able to turn a profit by taking on more operations.

Front 4

businesses will be willing to pay a higher rate or lower rate to borrow funds since these funds can be used to create profitability, even at an increased price?

Back 4

higher

Front 5

If consumers are more eager to spend (either because they can afford to do so or because they think they can afford to do so) they are more willing to what?

Back 5

take out credit in order to spend.

Front 6

If consumers are more willing to take out credit in order to spend, businesses are willing to what?

Back 6

accept higher credit rates for this spending.

Front 7

As time preferences for consumption increases, rates do what?

Back 7

increase

Front 8

Those with poor credit end up paying higher rates, which makes what?

Back 8

default more likely.

Front 9

When risk is higher, interest rates are what?

Back 9

higher

Front 10

When extending inflation is higher, this means what?

Back 10

that lenders are not going to earn as much from interest

Front 11

When extending inflation is higher, why are lenders are not going to earn as much from interest?

Back 11

because prices will be increasing in the future.

Front 12

Lenders charge a higher or lower rate in order to preserve some of this spending power.

Back 12

higher

Front 13

When expected inflation is higher, interest rates are what?

Back 13

higher

Front 14

Upward slope due to do to what?

Back 14

an increase in expected inflation and increasing maturity risk premium.

Front 15

Corporate yield curves are higher or lower than that of Treasury securities?

Back 15

higher

Front 16

The higher risk of corporate default, the higher what?

Back 16

return rate required

Front 17

The spread between corporate and Treasury yield curves widens as the corporate bond rating increases or decreases?

Back 17

decreases

Front 18

What is the normal line in yield rates?

Back 18

Risk free rate

Front 19

Inverted or downward sloping yield rates might happen when current rates are very high or low?

Back 19

high

Front 20

Borrowers expect Inverted or downward sloping yield rates to go back up or down to more normal levels in the future?

Back 20

down

Front 21

Yield curves show what?

Back 21

interest rates over a long period of time.

Front 22

Long term treasury rates will usually be a little bit higher than short term rates due to what?

Back 22

the premium

Front 23

Liquidity is down, and the Interest rate risk is greater or lower?

Back 23

greater

Front 24

If current rates are very low (like now) the premium will be greater or lower?

Back 24

greater

Front 25

If the current rates are very low, then will the curve be more upward or downward sloped?

Back 25

upward

Front 26

If current rates are unusually high, then the premium can’t do what?

Back 26

offset the expectation that rates will fall

Front 27

If current rates are unusually high, then will the curve be an upward or downward slope?

Back 27

the curve has a downward slope

Front 28

Does the interest rate decrease or increase in a recession?

Back 28

increase

Front 29

Suppose a new process was developed that could be used to make oil out of seawater. The equipment required is quite expensive; but it would, in time, lead to low prices for gasoline, electricity, and other types of energy. What effect would this have on interest rates?

Back 29

demand for money increases, so interest rates will increase