Which of the following statements is CORRECT? Answer If expected inflation incre

Question

Which of the following statements is CORRECT? Answer If expected inflation increases, interest rates are likely to increase. If individuals in general increase the percentage of their income that they save, interest rates are likely to increase. If companies have fewer good investment opportunities, interest rates are likely to increase. Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities. Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.

Explanation / Answer

Answer

If expected inflation increases, interest rates are likely to increase

Note :

If individuals in general increase the percentage of their income that their saving may increase but interest rates are likely to increase or not is not predictable.

If companies have fewer good investment opportunities,ROE may increase but interest rates are not dependent on it

Interest rates on all debt securities tend to rise during recessions because recessions increase the requirement of money and which tends to increase interest rate. as fund are not available in market easily which create shortage of supply of money & increase the demand of money.

Interest rates on long-term bonds are more less volatile than rates on short-term debt securities .

Interest Rate incorporate inflation rate, if inflation rate increases it is most likelly that interest rate would rise.

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