In an effort to maintain price stability,it is expected that the European Central Bank will raise interest rates in the future.Which of the following is the most likely effect of such an action on short- and long-term interest rates in Europe?
A)Long-term interest rates will tend to be higher than short-term interest rates.
B)Long-term interest rates will be about the same as short-term interest rates.
C)Both long- and short-term interest rates would be expected to fall sharply.
D)No relative change in short- and long-term interest rates could be predicted.
E)Long-term interest rates will tend to be lower than short-term interest rates.

Question

Quizplus · Accepted Answer

When the central bank raises interest rates, short-term interest rates also rise. However, long-term interest rates tend to be affected more by market forces such as inflation expectations and economic growth prospects. Therefore, long-term rates may not increase as much as short-term rates, resulting in a wider gap between short-term and long-term rates, with long-term rates being higher.

In an Effort to Maintain Price Stability,it Is Expected That