Which of the following signals the rise in perceived risks in the financial markets?
A) Much higher interest rates are demanded of borrowers.
B) A widening of the TED spread.
C) Only short- term lending to households and firms.
D) All of the above.
E) None of the above.

Question

Quizplus · Accepted Answer

All of the given options signal the rise in perceived risks in the financial markets.

A) Much higher interest rates are demanded of borrowers: When perceived risks increase, lenders demand higher interest rates from borrowers as a compensation for taking on greater risk.

B) A widening of the TED spread: The TED spread is the difference between the three-month LIBOR (London Interbank Offered Rate) and the three-month Treasury bill yield. It is a measure of perceived credit risk in the economy. An increase in the TED spread indicates that lenders are charging higher interest rates to borrowers perceived to be riskier.

C) Only short-term lending to households and firms: If perceived risks increase, lenders may become reluctant to lend for long periods of time, instead, they may insist on short-term lending only. This is because short-term loans are less risky than longer-term loans, as lenders can quickly adjust to any changes in market conditions.

Therefore, all of the given options signal the increase in perceived risks in the financial markets.

Which of the Following Signals the Rise in Perceived Risks