Quiz #24

• 1. If the non-government sector had a positive desire to save and the economy was at full employment, then in the absence of central bank intervention, the overnight interest rate would fall to zero.
• False
• True
• 2. Prior to the Great Depression, economists believed that saving was required to provide the funds for investment and that the interest rate would regulate the relationship between the two. Keynes showed that investment created its own saving through income adjustments rather than interest rate adjustments.
• False
• True
• 3. In a deflationary environment, the real interest rate will eventually rise as long as the central bank does not introduce negative overnight rates.
• False
• True
• 4. A negative overnight interest rate means that the central bank is effectively imposing a fine on or taxing the private banks that hold reserves overnight. This is not inconsistent, however, with the central bank's major role which is to see there are sufficient reserves in the banking system at all times.
• False
• True
• 5. In a mainstream macroeconomics model there can be no general overproduction (unsold goods) and therefore no unemployment if the real interest rate is allowed to adjust freely to match unconsumed income with the intentions of investors.
• False
• True