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

Question

Quizplus · Accepted Answer

Generally, when short-term interest rates decrease, long-term interest rates also decrease, but by a lesser amount. This is because long-term rates are influenced by a variety of factors, including inflation expectations and the overall health of the economy, while short-term rates are more sensitive to changes in monetary policy. Therefore, the long-term rate will decrease, but by less than the short-term rate.

Suppose There Is a Decrease in the Short-Term Interest Rate