Classify each of the following in terms of their effect on interest rates (increase or decrease):
I. Perceived risk of financial securities increases.
II. Near term spending needs decrease.
III. Future profitability of real investments increases.
A)I increases: II increases: III increases
B)I increases: II decreases: III decreases
C)I decreases: II increases: III increases
D)I decreases; II decreases; III decreases
E)None of these choices are correct.

Question

Quizplus · Accepted Answer

I increases: When the perceived risk of financial securities increases, investors demand higher returns for the increased risk, leading to higher interest rates. II decreases: If near-term spending needs decrease, there's less demand for borrowing, which can lead to lower interest rates. III increases: If the future profitability of real investments increases, it can lead to higher demand for borrowing to fund these investments, potentially increasing interest rates. However, none of the provided options accurately reflects these relationships.

Classify Each of the Following in Terms of Their Effect