Suppose there is an increase in the short- term interest rate. Given this increase in the current short- term interest rate, which of the following will most likely occur?
A) The long- term interest rate will decrease.
B) The long- term interest rate will increase, but by less than the short- term rate.
C) The long- term interest rate will remain the same.
D) The long- term interest rate will increase by more than the short- term rate.
E) The long- term interest rate will increase by the same amount as the short- term rate.

Question

Quizplus · Accepted Answer

An increase in the short-term interest rate may signal that inflation is on the rise, which could lead to an increase in the long-term interest rate as well. However, the increase in the long-term interest rate is likely to be less than the increase in the short-term interest rate because investors may still seek the security of longer-term investments even in the face of rising short-term rates.

Suppose There Is an Increase in the Short- Term Interest