Question

Which of the following best expresses the relationship between the availability of mortgage money and the level of interest rates?

1) If the federal government debt were reduced, interest rates would rise.
2) By lowering reserve requirements for member banks, the Federal Reserve System can lower interest rates.
3) When money is abundant, interest rates remain stable.
4) Borrowing by industry or by consumers has no effect on mortgage interest rates.

Answer 1

The availability of mortgage money and the level of interest rates are influenced by changes in the federal funds rate, but specific mortgage interest rates are determined by supply and demand in the lending and borrowing markets.

Step-by-step explanation:

Financial markets display a wide range of interest rates, representing borrowers with different risk premiums and loans that they must repay over different periods of time. When the federal funds rate drops, other interest rates tend to drop as well, and when the federal funds rate rises, other interest rates rise too. However, changes in the federal funds rate typically have a smaller effect on long-term mortgage interest rates. Monetary policy can influence the overall level of interest rates, but specific interest rates are determined by supply and demand in the lending and borrowing markets.