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From 2007 to 2009, the long-term real interest rate paid by the safest corporations increased...

Question:

From 2007 to 2009, the long-term real interest rate paid by the safest corporations increased from 2.3 percent to 3.8 percent.During that same period,the overnight loans rate fell from 4.5 percent to 0.25 percent a year.

A rise in the long-term real interest rate plays a role in the monetary policy transmission process because it does all of the following except _ _ _ _ _ _ _ .

A. it lowers the Canadian interest rate differential

B. it decreases consumption expenditure

C. it increases saving

D. it decreases investment

Long-term interest rate.

The long-term interest rate refers to the interest rate that is charged for a financial instrument with a maturity period of more than one year.

Commonly, the long-term interest rate tends to be higher than the short-term interest rate due to the added risk incurred by an investor as a result of giving out loans for a longer period.

Answer and Explanation:

The right answer is option a.)

An increase in the long-term interest rate tends to decrease consumption while increasing savings. This is because the people saving their funds anticipate higher return for there saved funds.

Also, a rise in long-term interest rates increases the cost of borrowing to the investors. An increase in the long-term interest rate means that borrowers will have to pay more for borrowed funds. consequently, inventors tend to borrow less, therefore, causing a decrease in overall investment.

However, an increase in the long-term interest rate does not lower the interest rate differential but instead, increases it.

In 2007, the interest rate differential was: 2.2%: 4.5% - 2.3%. This is the difference between short-term and long-term interest rates in that year.

In 2009, The interest rate differential was 3.55%: 3.8% - 0.25%.


Learn more about this topic:

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Sources of Long-Term Financing

from Business 100: Intro to Business

Chapter 23 / Lesson 4
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