Which of the following statements best describes interest rates?
A)The cost of money to fund users is basically determined by the rate of return required by fund providers.
B)If individuals in general increase the percentage of their income that they save, interest rates are likely to increase.
C)If companies have fewer good investment opportunities, interest rates are likely to increase.
D)If expected inflation increases, interest rates are likely to decrease.

Question

Quizplus · Accepted Answer

Interest rates are determined by the balance between the supply of funds from savers and the demand for funds from borrowers. The rate of return required by savers is a key factor in determining the cost of money for borrowers.

Answer: B 
 If individuals save more of their income, the supply of funds available for lending increases, which puts downward pressure on interest rates.

Answer: C 
 If companies have fewer profitable investment opportunities, they may offer higher interest rates to attract funds from savers.

Answer: D 
 If inflation is expected to increase, lenders may demand higher interest rates to compensate for the effect of inflation on their returns. Therefore, interest rates are likely to increase in response to expected inflation.

Which of the Following Statements Best Describes Interest Rates