Lesson M5.1.2

M5.1.2 Determination of interest rates Quiz: OCR Economics, Unit 10

20 questions

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Lesson M5.1.2, Determination of interest rates: 20 multiple choice questions for the OCR Economics (H460), Unit 10: The financial sector, written with Revision Ninja.

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The 20 questions

  1. According to Keynes, which theory explains short-run interest rate determination?

    • Permanent income hypothesis
    • Liquidity preference theory
    • Quantity theory of money
    • Loanable funds theory

  2. What happens to market bond prices when interest rates rise?

    • They remain constant
    • They double
    • They rise
    • They fall

  3. Which motive for holding money depends primarily on the level of interest rates?

    • Precautionary motive
    • Regulatory motive
    • Transactions motive
    • Speculative motive

  4. Which committee directly sets the UK official Bank Rate?

    • Monetary Policy Committee
    • Economic Advisory Council
    • Financial Policy Committee
    • Competition Commission

  5. A bond with a £100 face value pays a £5 coupon. What is its yield at £100 market price?

    • 5%
    • 20%
    • 2%
    • 10%

  6. If a bond price rises from £100 to £200, what happens to its yield?

    • It quadruples
    • It doubles
    • It remains unchanged
    • It halves

  7. What is the real interest rate if the nominal interest rate is 6% and inflation is 2%?

    • 12%
    • 4%
    • 3%
    • 8%

  8. In a standard Keynesian money market diagram, how is the money supply curve usually drawn?

    • Upward-sloping
    • Vertical
    • Horizontal
    • U-shaped

  9. What term describes a situation where interest rates are near zero and monetary policy becomes ineffective?

    • Liquidity trap
    • Credit crunch
    • Crowding out
    • Moral hazard

  10. If the central bank buys government bonds, what immediate effect does this have on bond yields?

    • Yields remain unchanged
    • Yields fall
    • Yields rise
    • Yields double

  11. Calculate the yield of a bond costing £80 that pays an annual coupon of £4.

    • 4%
    • 8%
    • 3.2%
    • 5%

  12. What is the opportunity cost of holding money as cash rather than interest-bearing assets?

    • Capital gains
    • Forgone interest
    • Transaction costs
    • Inflation rate

  13. What condition exists in the money market if market interest rates fall below equilibrium?

    • Zero liquidity preference
    • Excess demand for money
    • Excess supply of money
    • Balanced money supply

  14. Which term refers to the difference between a commercial bank lending rate and borrowing rate?

    • Net interest margin
    • Capital buffer
    • Liquidity ratio
    • Reserve ratio

  15. How does an increase in the official Bank Rate typically affect commercial bank lending rates?

    • They become negative
    • They increase
    • They decrease
    • They remain unchanged

  16. What graph plots bond yields against their remaining maturity lengths?

    • Laffer curve
    • Yield curve
    • Lorenz curve
    • Phillips curve

  17. An inverted yield curve typically signals what expected movement in future interest rates?

    • Rise
    • Remain constant
    • Fall
    • Fluctuate wildly

  18. According to the Fisher equation, what equals the nominal interest rate minus expected inflation?

    • Effective exchange rate
    • Real interest rate
    • Coupon rate
    • Base rate

  19. Which motive for holding money is driven by unexpected emergency spending requirements?

    • Transaction motive
    • Speculative motive
    • Profit motive
    • Precautionary motive

  20. In Classical economic theory, what determines real interest rates in the long run?

    • Government bond yields
    • Savings and investment
    • Commercial bank reserves
    • Liquidity preference

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