Apart from risk components, several macroeconomic factors-such as Federal Reserv

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: Statements True False During the credit crisis of 2008, investors around the world were fearful about the collapse of real estate markets, shaky stock markets, and illiquidity of several securities in the United States and several other nations. The demand for U.S. Treasury bonds increased, which led to a rise in their price and a decline in their yields. When the economy is weakening, the Fed is likely to increase short-term interest rates. When the Fed increases the money supply, short-term interest rates tend to decline. When the economy is weakening, the Fed is likely to decrease short-term interest rates.

Explanation / Answer

1-

TRUE

because more demand of fed treasury bills will lead to higher market prices which in turn results in decreasing YTM

2-

FALSE

Fed will decrease the interest rates

3-

TRUE

because it will ensure the increased money supply, fed will decrease the interest rate to demotivate the savings

4-

TRUE

because be decreasing the short term interest rates, fed can ensure high demand for funds to increase the growth

1-

TRUE

because more demand of fed treasury bills will lead to higher market prices which in turn results in decreasing YTM

2-

FALSE

Fed will decrease the interest rates

3-

TRUE

because it will ensure the increased money supply, fed will decrease the interest rate to demotivate the savings

4-

TRUE

because be decreasing the short term interest rates, fed can ensure high demand for funds to increase the growth

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