Which of the following factors will tend to cause the risk free rate to rise?
I.An increase in the money supply.
II.An increase in the federal budget deficit.
III.An increase in the level of economic activity.
IV.Falling rates in foreign markets.

Question

Quizplus · Accepted Answer

I. An increase in the money supply: This would tend to decrease the risk-free rate, not increase it.
II. An increase in the federal budget deficit: This would tend to increase the risk-free rate due to the increased demand for borrowing, which drives up interest rates.
III. An increase in the level of economic activity: This would tend to increase the risk-free rate due to increased demand for borrowing, which drives up interest rates.
IV. Falling rates in foreign markets: This would tend to decrease the risk-free rate, not increase it. 
Therefore, only II and III would tend to cause the risk-free rate to rise.

Which of the Following Factors Will Tend to Cause the Risk