Question

Average: 4 9. Macroeconmic factors that influence interest rate levels Aa Aa 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 When the Fed increases the money supply, short-term interest rates tend to decline. Actions that lower short-term interest rates will always lower long-term interest rates. During recessions, short-term interest rates decline more sharply than long-term interest the Fed is likely to decrease short-term interest rates

Answer 1

First statement is TRUE.

When fed increases money supply interest rate tends to decline in order to reduce the demand for bonds and increase the demand for money.

Second statement is false

In the long run we have neutrality of money. This means that monetary policy does not effect real variables like output, interest rate in the long run. So even if there is an increase in money supply which lowers interest rate in the short run, will not lower the interest rate in the long run.

Third statement is TRUE

This is because long term interest rate reflect average inflation rate which does not change much in long run even though inflation is high in short run.

Fourth statement is TRUE

During weakening fed reduces interest rate to ease lending which could further increase total output inn the economy.