Which of the following statements is CORRECTσ
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

When expected inflation increases, lenders demand higher nominal interest rates to compensate for the decrease in purchasing power of the money they will be repaid in the future.

Answer: B
 If individuals save more of their income, there will be an increase in the supply of loanable funds in the economy, which would put downward pressure on interest rates.

Answer: C
 When companies have fewer good investment opportunities, they will be less likely to borrow money. As a result, the supply of loanable funds could increase, putting downward pressure on interest rates. If this doesn't happen, interest rates could rise due to increased competition for the available funds.

Answer: E
 Long-term bonds are more sensitive to changes in interest rates because the cash flows paid out over a long time period are subject to greater uncertainty and risk. This implies that long-term bonds will be more volatile than short-term debt securities.

Which of the Following Statements Is CORRECTσ