Question

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:

a. Long-term interest rates are not as sensitive to booms and recessions as are short-term interest rates.
i. True
ii. False
b. If the Fed injects a huge amount of money into the markets, inflation is expected to decline, and long-term interest rates are expected to rise.
i. True
ii. False
c. When the Fed increases the money supply, short-term interest rates tend to decline.
i. True
ii. False
d. When the economy is weakening, the Fed is likely to decrease short-term interest rates.
i. True
ii. False

Answer 1

Answer:

a. True

b. False

c. True

d. True

Explanation:

Long-term interest rates are not as sensitive to booms and recessions as are short-term interest rates.

i. True

b. If the Fed injects a huge amount of money into the markets, inflation is expected to decline, and long-term interest rates are expected to rise.

ii. False

c. When the Fed increases the money supply, short-term interest rates tend to decline.

i. True

d. When the economy is weakening, the Fed is likely to decrease short-term interest rates.

i. True