An increase in the spread between interest rates on10-year bonds of Italy and Spain and interest rates on 10-year bonds of Germany indicates:
A)an increasing probability of a liquidity trap in Italy and Spain.
B)an increasing probability of a liquidity trap in Germany.
C)a perception of increasing risk in Italy and Spain.
D)a perception of decreasing risk in Italy and Spain.

Question

Quizplus · Accepted Answer

An increase in the spread between interest rates on 10-year bonds of Italy and Spain and interest rates on 10-year bonds of Germany indicates a perception of increasing risk in Italy and Spain. This is because investors demand a higher return to compensate for the perceived higher risk in investing in those countries.

An Increase in the Spread Between Interest Rates On10-Year Bonds