Question 1

During or near peaks of business activity, yield curves generally are either flat or downward sloping.

Accepted Answer

The answer of During or near peaks of business activity,...

Question 2

If the Federal Reserve tightens the money supply, other things held constant, short-term interest rates will be pushed upward, and this increase will generally be greater than the increase in rates in the long-term market.

Accepted Answer

When the Federal Reserve tightens the money supply, short-term interest rates will typically rise faster and to a greater extent than long-term interest rates. This is because short-term rates are more directly influenced by changes in the federal funds rate, which is controlled by the Fed, while long-term rates are influenced by a wide range of factors and expectations beyond the Fed's control.

Question 3

Everything else equal, as a country increases its borrowing to finance its foreign trade deficit, interest rates will be driven up.

Accepted Answer

Increasing borrowing to finance a foreign trade deficit can lead to an increase in demand for loanable funds, which can drive up interest rates.

Question 4

The yield curve is downward sloping, or inverted, if the inflation rates are expected to increase.

Accepted Answer

The yield curve is downward sloping or inverted when the short-term interest rates are higher than the long-term interest rates, which may indicate market expectations of an economic downturn or recession. The inflation rates are not directly related to the shape of the yield curve.

Question 5

In general, when rates in the financial markets increase, the prices (values) of financial assets decrease.

Accepted Answer

This is because higher interest rates make it more expensive for companies and individuals to borrow money, which can decrease demand for financial assets such as bonds and stocks. Additionally, higher rates may lead investors to consider alternative investments that offer higher yields, which can further decrease demand and thus decrease prices of financial assets.

Question 6

A deficit trade balance hinders the Federal Reserve's ability to lower interest rates when combatting a recession.

Accepted Answer

A deficit trade balance can lead to a weakened currency and inflation, making it difficult for the Federal Reserve to lower interest rates during a recession without risking further inflation.

Question 7

Suppose you have information that a recession is ending and the economy is about to enter a boom. If your firm must borrow money, it should probably issue long-term rather than short-term debt.

Accepted Answer

Issuing long-term debt would lock in a lower interest rate for a longer period of time, which would be beneficial during a period of economic expansion. Short-term debt would need to be refinanced sooner and could be subject to higher interest rates as the economy improves.

Question 8

The value of an asset is the future value of the cash flows that the asset is expected to generate during its life.

Accepted Answer

The value of an asset is typically considered to be the present value of the cash flows it is expected to generate, not the future value.

Quiz 5: The Cost of Money Interest Rates