Each of the following is a potential cause of slippage between short-term, nominal, safe, interest rates and long-term, real, risky, interest rates except
A) changes in the term premium between short and long interest rates.
B) changes in the rate of inflation.
C) changes in the expected profitability of investment projects.
D) changes in the risk premium.

Question

Quizplus · Accepted Answer

Changes in the expected profitability of investment projects primarily affect investment decisions and the demand for loans rather than the relationship between short-term, nominal, safe interest rates and long-term, real, risky interest rates directly. The other options (A, B, D) directly influence the spread between these rates through changes in term premium, inflation expectations, and risk premium, respectively.

Each of the Following Is a Potential Cause of Slippage