What factors might cause the interest rates to differ? Explain
What will be an ideal response?
There are about five factors that cause interest rates to differ: (a) Interest rates vary depending on the degree of risk involved in the loan. Loans with higher risk will command higher interest rates. (b) The maturity of the loan can affect the interest rate, with longer terms usually paying higher rates. (c) Loan size can be a factor; smaller loans tend to have higher interest rates than larger loans reflecting administrative costs. (d) Taxation can play a role in affecting loan interest rates. Taxable loans will command a higher rate than nontaxable loans. (e) Market imperfections can give a degree of monopoly power to some lenders causing somewhat higher loan rates.
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Given the desire of politicians to get reelected, they might try in the short run to use _____
a. a contractionary monetary policy b. an expansionary fiscal policy c. an expansionary monetary policy d. tax increases e. automatic stabilizers to control demand
Suppose households attempt to decrease their money holdings. To counter this decrease in money demand and stabilize output, the Federal Reserve will
a. increase government spending. b. increase the money supply. c. decrease government spending. d. decrease the money supply.