Which of the following statements is CORRECT,other things held constant?
A) If companies have fewer good investment opportunities,interest rates are likely to increase.
B) If individuals increase their savings rate,interest rates are likely to increase.
C) If expected inflation increases,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

When expected inflation increases, lenders demand higher interest rates to compensate for the loss of purchasing power of the money they will be repaid in the future. This means that interest rates are likely to increase. Option A is incorrect as if companies have fewer good investment opportunities, they may reduce their demand for funds, and interest rates may go down. Option B is incorrect as if individuals increase their savings rate, the supply of funds increases, and interest rates may go down. Option D is incorrect as interest rates tend to decrease during recessions due to the lower demand for funds. Option E is incorrect as interest rates on short-term debt securities are typically more volatile than on long-term bonds.

Which of the Following Statements Is CORRECT,other Things Held Constant