Question

Countries with strong balance sheets and declining budget deficits tend to have lower interest rates. When the economy is weakening, the Fed is likely to increase short-term interest rates. During the credit crisis of 2008, investors around the world were fearful about the collapse of real estate markets, shaky stock markets, and liquidity of several securities in the United States and several other nations. The demand for US Treasury bonds increased, which led to a rise in their price and a decline in their yields. The Federal Reserve’s ability to use monetary policy to control economic activity in the United States is limited because US interest rates are highly dependent on interest rates in other parts of the world.

Answer 1

Answer:

Solution for question 1

It is not necessary that action that lower the short term interest rate will lower the long term interest rate also.

So given statement is false.

Solution for question 2

Because of subprime crisis in 2008 most of the Market collapsed and there is a huge problem of liquidity. Yield on US treasury security was decreased and so the price of treasury securities was increased.

Hence, given statement is true.

Solution for question 3

Countries with strong balance sheet mean countries are developed and so interest rate in these countries is lowered.

Hence, given statement is true.

Solution for question 4

One of the major function of Federal Reserve is to control economic activities. In the Era of globalization all countries economy is depend on other economy. So interest rate in USA highly dependent on other countries.

Hence, given statement is true.