The long-term interest rate ______. A. is generally a bit higher than the short-
ID: 1127572 • Letter: T
Question
The long-term interest rate ______.
A.
is generally a bit higher than the short-term interest rate because long-term loans are riskier than short-term loans
B.
fluctuates more than the short-term rate because people borrow long term and lend short term
C.
is generally a bit higher than the short-term interest rate because banks prefer to make short-term loans
D.
is not influenced by expectations about future short-term interest rates because expectations change in the long run
E.
is not influenced by current short-term interest rates because people borrow long term
Explanation / Answer
Long term loans are riskier than short term loan because long term loan may become non performing asset. So interest rate on long term loans is higher than that of short term loan.
If the long term interest rate is higher than short term interest rate, investors will prefer to lend for long term and borrow for short term, long term interest will fall. Again if long term interest rate is lower than short term interest rate investors will lend for short term and borrow for long term. Long term interst will increase. So long term interest rate is influenced by the expectation about future short term interest rate.
Long term interest rate is flactuate less than short term interest rate because they are influenced by both expectation about future interest rate and current interest rate.
Thus option A is correct.
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