Which of the following is true?
A) Monetary policy influences long-term real interest rates more than short-term interest rates.
B) Short-term interest rates are primarily determined by real factors and the expected inflation.
C) A shift to a more expansionary monetary policy will tend to raise short-term interest rates.
D) A shift to expansionary monetary policy that increases the fear of future inflation will tend to increase long-term interest rates.

Question

Quizplus · Accepted Answer

A shift to expansionary monetary policy that increases the fear of future inflation will tend to increase long-term interest rates. This is because investors will demand higher yields to compensate for the expected decline in the value of their money due to inflation, leading to an increase in long-term interest rates. Monetary policy has a greater impact on the short-term interest rates, which are influenced mainly by the central bank's policy rate and market expectations of future rates based on perceived economic conditions. Real factors such as productivity, capital deepening, and technological advancements are the primary determinants of short-term interest rates with inflation expectations being a secondary factor.

Which of the Following Is True