Borrowers and lenders make transactions based on the

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1. From the beginning of the 1990s to the year 2000, investment spending as a share of U.S. GDP has tended to:

A) increase.

B) remain the same.

C) decrease.

D) fluctuate wildly.

2. Suppose that a firm can invest $100 today in a project and receive $105 a year from today. There is no inflation, and the annual interest rate in the economy is 4%. The firm should:

A) not invest in the project because the opportunity cost is less than the return on the investment.

B) invest in the project because the opportunity cost is the same as the return on the investment.

C) invest in the project because the opportunity cost is less than the return on the investment.

D) invest in the project because the opportunity cost is greater than the return on the investment.

3. If the nominal interest rate is 6 percent and the inflation rate is 4 percent, then the real rate of interest is:

A) -2 percent.

B) 2 percent.

C) 6 percent.

D) 10 percent.

4. Borrowers and lenders make transactions based on the:

A) real interest rate.

B) expected real interest rate less the expected rate of inflation.

C) expected real interest rate.

D) expected nominal interest rate.

5. If a firm wants to finance a new project, it can obtain financing by:

A) selling corporate bonds to the public.

B) using its retained earnings.

C) issuing and selling new shares of stock.

D) all of the above

Reference no: EM13773797

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