Question

21) A decrease in expected inflation: _______.

A) will lead to more borrowings

B) leads to flatter yield curves

C) will lower the interbank rate

D) indicates an independent central bank

22) The rate charged on a repurchase agreement between 2 parties will be LEAST dependent on the: _______.

A) borrower of funds

B) collateral provided

C) maturity of the borrowing

D) haircut on the collateral

Answer 1

21.

Answer: B

Yield curve depends on inflation rate – if expected inflation is high, there will be higher demand of yield for minimizing inflation risk, causing the rising trend of yield curve. But if such expected inflation is low, the demand of higher yield would be low, causing a flatter yield curve.

22.

Answer: C

This is the process of selling in which there is an agreement of repurchasing. The borrower (or seller) and collateral are important to determine the interest rate. But since this is a repurchase agreement, it is definitely a short-term nature; therefore, maturity is not so important.