Question

Choose the correct word in brackets to complete the following:(1) Which fluctuate more-long-term or short-term interest rates? Why?(Short or long) -term interest rates are (more or less) volatile because the (Federal Reserve or Internal Revenue Service) operates mainly in the (short or long) -term sector, hence (Federal Reserve or Internal Revenue Service) intervention has its major effect here, and (short or long) -term interest rates reflect the average expected inflation rate over the next (1 to 2 or 20 to 30) years, and this average does not change as radically as year-to-year expectations.(2) What does it mean when it is said that the United States is running a trade deficit? What impact will a trade deficit have on interest rates?The (larger or smaller) the trade deficit, the (lower or higher) the tendency to (lend or borrow) . Foreigners will hold U.S. debt if and only if the rates on U.S. securities are (lower or competitive) with rates in other countries. This causes U.S. interest rates to be (highly or not very) dependent on rates in other parts of the world. This interdependency (limits or aids) the ability of the (Federal Reserve or Internal Revenue Service) to use (fiscal or monetary) policy to control economic activity in the United States. For example, if the (Federal Reserve or Internal Revenue Service) attempts to (lower or raise) U.S. interest rates and this causes rates to (fall below or rise above) rates abroad, foreigners will begin (selling or buying) U.S. bonds. Those (sales or purchases) will depress bond prices, which will push up rates in the U.S.. Thus, the large U.S. trade deficit (hinders or aids) the (Federal Reserve or Internal Revenue Service) ability to combat a recession by lowering interest rates.(3) Suppose you have noticed that the slope of the corporate yield curve has become steeper over the past few months. What factors might explain the change in the slope? (1) Inflation is expected to be (higher or lower) in the future.(2) There is a positive (default or maturity) risk premium.A downward sloping yield curve yield curve when inflation is expected to (decrease or increase) . Such a downward sloping yield curve often foreshadows an economic (upturn or downturn) because of weaker economic conditions generally lead to declining inflation, which in turn results in (lower or higher) long-term rates.Recall that corporate bonds include a risk premium (DRP) and a premium (LP). One recent study estimates that both the default risk premium and liquidity premium vary over time, and the majority of the corporate bond yield spread can be attributed to (default or liquidity) risk.For example, the (default or liquidity) risk on Coca-Cola's short term debt is very small because there is almost no change that Coca-Cola will go bankrupt over the next few years. However, Coke has some bonds that have a maturity of all most (100 or 500) years. There is a higher probability of default risk on Coke's (long or short) -term bonds than on its (long or short) -term bonds.

Answer 1

Answer:

(1) Which fluctuate more-long-term or short-term interest rates? Why?(Short or long) -term interest rates are (more or less) volatile because the (Federal Reserve or Internal Revenue Service) operates mainly in the (short or long) -term sector, hence (Federal Reserve or Internal Revenue Service) intervention has its major effect here, and (short or long) -term interest rates reflect the average expected inflation rate over the next (1 to 2 or 20 to 30) years, and this average does not change as radically as year-to-year expectations.

(2) What does it mean when it is said that the United States is running a trade deficit? What impact will a trade deficit have on interest rates?

The (larger or smaller) the trade deficit, the (lower or higher) the tendency to (lend or borrow) . Foreigners will hold U.S. debt if and only if the rates on U.S. securities are (lower or competitive) with rates in other countries. This causes U.S. interest rates to be (highly or not very) dependent on rates in other parts of the world. This interdependency (limits or aids) the ability of the (Federal Reserve or Internal Revenue Service) to use (fiscal or monetary) policy to control economic activity in the United States. For example, if the (Federal Reserve or Internal Revenue Service) attempts to (lower or raise) U.S. interest rates and this causes rates to (fall below or rise above) rates abroad, foreigners will begin (selling or buying) U.S. bonds. Those (sales or purchases) will depress bond prices, which will push up rates in the U.S.. Thus, the large U.S. trade deficit (hinders or aids) the (Federal Reserve or Internal Revenue Service) ability to combat a recession by lowering interest rates.

(3) Suppose you have noticed that the slope of the corporate yield curve has become steeper over the past few months. What factors might explain the change in the slope?

(1) Inflation is expected to be (higher or lower) in the future.(2) There is a positive (default or maturity) risk premium. A downward sloping yield curve yield curve when inflation is expected to (decrease or increase) . Such a downward sloping yield curve often foreshadows an economic (upturn or downturn) because of weaker economic conditions generally lead to declining inflation, which in turn results in (lower or higher) long-term rates. Recall that corporate bonds include a risk premium (DRP) and a premium (LP). One recent study estimates that both the default risk premium and liquidity premium vary over time, and the majority of the corporate bond yield spread can be attributed to (default or liquidity) risk. For example, the (default or liquidity) risk on Coca-Cola's short term debt is very small because there is almost no chance that Coca-Cola will go bankrupt over the next few years. However, Coke has some bonds that have a maturity of all most (100 or 500) years. There is a higher probability of default risk on Coke's (long or short) -term bonds than on its (long or short) -term bonds.

Explanation:

The Federal Reserve manages the monetary policy by influencing short-term interest rates and the availability and cost of credit in the economy.  While its monetary policy directly affects interest rates, it also indirectly affects stock prices, wealth, and currency exchange rates.