Which of the following statements is CORRECT?
A) If expected inflation increases, interest rates are likely to increase.
B) If individuals in general increase the percentage of their income that they save, interest rates are likely to increase.
C) If companies have fewer good investment opportunities, interest rates are likely to increase.
D) Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.
E) Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.

Question

Quizplus · Accepted Answer

Expected inflation is one of the main factors that influence interest rates. When people anticipate that inflation will rise, they demand higher interest rates to compensate for the lost purchasing power associated with the repayment of the principal and interest.

Answer: B
 When individuals increase the percentage of their income that they save, they create excess supply in the credit markets, which reduces the cost of borrowing money. Consequently, interest rates decrease.

Answer: C
 When companies have fewer good investment opportunities, they may decide to save their earnings rather than invest them. If this happens on a large scale, the supply of credit in the market will increase, which will reduce interest rates.

Answer: E
 Short-term interest rates are more influenced by changes in monetary policy, whereas long-term rates are more influenced by factors such as economic growth, inflation expectations, and geopolitical risks. As a result, long-term bonds are more volatile than short-term debt securities.

Therefore, the correct answers are A, B, C, and E.

Which of the Following Statements Is CORRECT