During the 1974-1975 recession, the rate on commercial paper increased relative to the rate on T-Bills. This was an indication of the fact that
A)investors had become nervous about the ability of the federal government to meet its financial obligations.
B)the inflation rate had increased significantly.
C)investors had become concerned about default risk in the short-term market.
D)interest on commercial paper had lost its exemption from the federal income tax.

Question

Quizplus · Accepted Answer

During a recession, lenders become more cautious and move to safer investments. Commercial paper is a short-term debt instrument used by corporations to raise money, but it is riskier than T-Bills because it is unsecured. Thus, when investors become concerned about default risk in the short-term market, the rate on commercial paper increases relative to the rate on T-Bills. This was the case during the 1974-1975 recession.

During the 1974-1975 Recession, the Rate on Commercial Paper Increased