Exam (elaborations)
CHAPTER 5 (BODIE, KANE) QUESTIONS WITH CORRECT ANSWERS 2025
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CHAPTER 5 (BODIE, KANE) QUESTIONS WITH CORRECT ANSWERS 2025
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CHAPTER 5 (BODIE, KANE) QUESTIONSWITH CORRECT ANSWERS 2025
realVinterestVrateV-VcorrectVanswer-theVinterestVrateVcorrectedVforVtheVeffectsVofVinflation
nominalVinterestVrateV-VcorrectVanswer-
theVinterestVrateVasVusuallyVreportedVwithoutVaVcorrectionVforVtheVeffectsVofVinflation
CPIV-VcorrectVanswer-
(consumerVpriceVindex)VaVmeasureVofVtheVoverallVcostVofVtheVgoodsVandVservicesVboughtVbyVaVtypicalVcons
umer
InfluencesVInterestVRateV-VcorrectVanswer-1.VTheVsupplyVofVfundsVfromVsavers,VprimarilyVhouseholds.
2.VTheVdemandVforVfundsVfromVbusinessesVtoVbeVusedVtoVfinanceVinvestmentsVinVplant,Vequipment,VandVin
ventoriesV(realVassetsVorVcapitalVformation).
3.VTheVgovernment'sVnetVsupplyVofVorVdemandVforVfundsVasVmodifiedVbyVactionsVofVtheVFederalVReserveVB
ank.
SupplyVcurveVforVinterestVratesV-VcorrectVanswer-
TheVsupplyVcurveVslopesVupVfromVleftVtoVrightVbecauseVtheVhigherVtheVrealVinterestVrate,VtheVgreaterVtheVs
upplyVofVhouseholdVsavings.VTheVassumptionVisVthatVatVhigherVrealVinterestVratesVhouseholdsVwillVchooseVt
oVpostponeVsomeVcurrentVconsumptionVandVsetVasideVorVinvestVmoreVofVtheirVdisposableVincomeVforVfutu
reVuse.
DemandVcurveVforVinterestVratesV-VcorrectVanswer-
TheVdemandVcurveVslopesVdownVfromVleftVtoVrightVbecauseVtheVlowerVtheVrealVinterestVrate,VtheVmoreVbus
inessesVwillVwantVtoVinvestVinVphysicalVcapital.VAssumingVthatVbusinessesVrankVprojectsVbyVtheVexpectedVre
alVreturnVonVinvestedVcapital,VfirmsVwillVundertakeVmoreVprojectsVtheVlowerVtheVrealVinterestVrateVonVtheVf
undsVneededVtoVfinanceVthoseVprojects
RV=VrV+VE(i)V-VcorrectVanswer-
TheVequationVimpliesVthatVifVrealVratesVareVreasonablyVstable,VthenVincreasesVinVnominalVratesVoughtVtoVpr
edictVhigherVinflationVrates.VThisVrelationshipVhasVbeenVdebatedVandVempiricallyVinvestigated.VTheVresultsV
areVmixed;ValthoughVtheVdataVdoVnotVstronglyVsupportVthisVrelation-
Vship,VnominalVinterestVratesVseemVtoVpredictVinflationVasVwellVasValternativeVmethods,VinVpartVbecauseVw
eVareVunableVtoVforecastVinflationVwellVwithVanyVmethod.
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