Based on Application 8.2, "An Interest Rate Primer,"you should expect that when the federal government borrows $2 billion it
A) a higher interest rate than a couple pays on a $150,000 mortgage loan because the government is borrowing more than the home buyers are borrowing.
B) a lower interest rate than a couple pays on a $150,000 mortgage loan because the risk of nonpayment by the government is lower than the risk of nonpayment by the home buyers.
C) the same interest rate as a couple pays on a $150,000 mortgage loan because there are so many lenders competing in the market that no one need pay a higher rate for a loan than anyone else.
D) none of the above.

Question

Quizplus · Accepted Answer

The correct answer is B because the interest rate on government borrowing is typically lower than that on personal borrowing, such as a mortgage, due to the lower risk of nonpayment by the government.