Question

Macroeconomic factors that influence Interest rate levels

Apart from risk components, several macroeconomic factors-such as Federal Reserve (the Fed) policy, federal budget deficit or surplus, international factors, and levels of business activity-influence interest rates. 

Based on your understanding of the impact of macroeconomic factors, identify which of the following statements are true or false: 

Statements	True	False
Actions that lower short-term interest rates will always lower long-term interest rates.
The Federal Reserve Board has a significant influence over the level of economic activity, inflation, interest rates in the United States.
During recessions, short-term interest rates decline more sharply than long-term interest rates.
When the Fed increases the money supply, short-term interest rates tend to decline.

Answer 1

1. True: an action which lower short term interest rate also lowers the long term interest rate but the magnitude can be different.
2. True: the federal reserve i.e the central bank of the country has a significant influence on the economic activities inflation and interest rates in the United States.
3. False: during a recession, the short term is more riskier than the long term. Hence the investor expects higher return during short term compared to the long term period. Therefore long term interest rate declines sharply.
4. True:
When the fed increases the liquidity of money i.e increases the money supply then the short-term interested declines.