Question

Macroeconomic factors that influence interest rate levels Aa Apart from risk components, several macroeconomic factors-such as Federal Reserve (the Fed) policy, federal budget deficit or surplus, international factors, and levels of business activity influence interest rates. Based on your understanding of the impact of macroeconomic factors, identify which of the following statements are true or false: False True Statements If the Fed injects a huge amount of money into the markets, inflation is expected to decline, O and long-term interest rates are expected to rise. Foreign investments fuel growth in a country. However, this investment is based on factorsO that affect the business environment and increase riskiness, such as macroeconomic policies, political changes, labor issues, tax rates, and regulations. Countries with strong balance sheets and declining budget deficits tend to have lower interest O rates. When the economy is weakening, the Fed is likely to decrease short-term interest rates.

Answer 1

All the given statements except first statement are true.

Step-by-step explanation:

If the Fed injects a huge amount of money into the markets, inflation is expected to decline and long-term interest rates are expected to rise

If the fed injects a huge amount of money into markets, then aggregate demand levels in the future are expected to rise and thereby inflation is also expected to rise not decline. To control the rising inflation, the Fed will increase the interest rates thereby implying an increase in longer term interest rates. Hence, the above statement is false.

Foreign investments fuel growth in a country. However, this investment is based on factors that affect the business environment and increase riskiness, such as macroeconomic policies, political changes, labor issues, tax rates and regulations

If the policies at the government (fiscal) and central bank (monetary) level are supportive of growth considering inflation, pro-business political changes, tax rates are progressive and other regulations support the economic system, then foreign investors would surely be attracted to invest in the country. Vice-versa will be the case if all the above mentioned factors go in another direction and unemployment level is higher. Hence, the above statement is true.

Countries with strong balance sheets and declining budget deficits tend to have lower interest rates

True.

The countries with stronger balance sheets, have lower interest rates as the monetary policy is investment supportive which boosts the GDP.

Declining budget deficits will involve lower deficit financing, which has a direct relation with inflation. Hence lower deficit financing implies lower inflation and lower interest rates thereby.

When the economy is weakening, the Fed is likely to decrease short-term interest rates

True. When the economy is weakening, the Fed would like to follow a monetary easing policy. This implies, it will lower the interest rates to boost investment and growth in the economy. Hence, interest rates are likely to decline in the shorter term thereby due to the weakening economy.