Which of the following statements is correct? If expected inflation increases, interest rates are likely to...
Which of the following statements is correct?
| If expected inflation increases, interest rates are likely to decrease. |
| If individuals in general increase the percentage of their income that they save, interest rates are likely to decrease. |
| If companies have fewer good investment opportunities, interest rates are likely to increase. |
| 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. |
| Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills. |
Homework Answers
CORRECT ANSWER :If individuals in general increase the percentage of their income that they save, interest rates are likely to decrease.
EXPLANATION : we know that nominal rate increases as inflation increases, so first option is incorrect.
secondly, if company does not have good opportunities, they are less likely to borrow so it has no relation with higher interest rate
thirdly, if market is in recession, banks reduce rates to encourage borrowing
and last, interest rates are more volatile in short run than the long run
so only second option is correct (THUMBS UP PLEASE)
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