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, III. an increase in the level of economic activity, and IV. falling rates in foreign markets would all tend to decrease the risk-free rate. However, an increase in the federal budget deficit would increase the risk-free rate due to the increased demand for borrowing and the perceived increase in default risk. Therefore, only options II and III would cause the risk-free rate to rise, making choice B the correct answer.

Which of the Following Factors Will Tend to Cause the Risk