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: Statements True False Countries with strong balance sheets and declining budget deficits tend to have lower interest rates. When the economy is weakening, the Fed is likely to increase short-term interest rates. Long-term interest rates are not as sensitive to booms and recessions as are short-term interest rates. The Federal Reserve Board has a significant influence over the level of economic activity, inflation, interest rates in the United States.

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: Statements True False Countries with strong balance sheets and declining budget deficits tend to have lower interest rates. When the economy is weakening, the Fed is likely to increase short-term interest rates. Long-term interest rates are not as sensitive to booms and recessions as are short-term interest rates. The Federal Reserve Board has a significant influence over the level of economic activity, inflation, interest rates in the United States.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter4: Exchange Rate Determination

Section: Chapter Questions

Problem 13QA

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Which of the following statements is NOT CORRECT? A. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing B. A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year C. The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans. D. If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10, net 30 to net 60.
Which of the following is most true? The nominal rate of a government long-term security can be used as a proxy for the real risk free rate. A direct relationship is exhibited between the investors’ willingness to supply funds and the interest rates of securities. Finance managers tend to favor more on long-term financing if the nation’s Gross Domestic Product is expected to contract. Maturity risk premium is always included in the nominal rate of any corporate security since corporations are perceived as less riskier than government.
One of the main arguments against using Fiscal Policy is the crowding out effect. Suppose the government uses government purchases to stimulate the economy. a) Explain the crowding out effect in detail using a graph for the bond market, the money market, the foreign exchange market, and the AD SRAS LRAS model. b). Explain quantitative easing? c) If the Fed’s current policy is quantitative easing, do you think that there is a danger of the government’s current fiscal policy being crowded out? Why or Why not? Explanation required for credit.
The so-called “dual monetary policy mandate” of the Federal Reserve calls for setting conditions conducive to: (a) best stock market performance and lowest interest rates; (b) maximum sustainable real economic growth and highest stock market performance; (c) maximum employment and price stability; (d) maximum money supply growth and a safe and sound banking system.
8. Macroeconomic factors that influence interest rate levels 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: Statements True False The larger the federal deficit, other things held constant, the higher are interest rates. When the economy is weakening, the Fed is likely to increase short-term interest rates. During recessions, short-term interest rates decline more sharply than long-term interest rates. The Federal Reserve’s ability to use monetary policy to control economic activity in the United States is limited because US interest rates are highly dependent on interest rates in other parts of the world.
Should the economy’s current fragile recovery gather momentum, it is likely the Federal Reserve will decide to subtract liquidity from the economy. How will it do that? By selling U.S. Treasury bonds By purchasing U.S. Treasury bonds By having the U.S. Treasury purchase goods and services By having the U.S. Treasury lower taxes By having the U.S. Treasury raise taxes
(a) Suppose that the economy of Microland is expanding rabidly. Due to this rapid expansion, the Federal Reserve Bank is pursuing a contractionary monetary policy. Draw clearly labeled graphs for each market (Money market, Goods Market and Investment) to show the effects of this policy on the equilibrium interest rate, investment and output. (b) Suppose that the economy of Macroland is expanding rabidly. Due to this rapid expansion, the Federal Government is pursuing a contractionary fiscal policy. Draw clearly labeled graphs for each market (Money market, Goods Market and Investment) to show the effects of this policy on the equilibrium interest rate, investment and output. Is there any crowding-out due to the contractionary fiscal policy?
How does the stable inflation targeting approach impede bank flexibility? Explain the estimation of risk free rate in the global analysis of hurdle rates?
There are claims that the central bank caused the recession, and due to them, production has dropped below the optimum level, and inflation has gone up. What would you say to defend the central bank? Explain in detail.
What risk is due to changes in the level of interest rate in the economy and may affect industries at the same time? a.systematic risk b. inflation rate risk c.foreign exchange rate risk d.interest rate risk
Suppose that the Fed wants to lower long-term interest rates and buys all the Treasury securities banks hold. Reflect those changes on the balance sheet (commitment to low long term interest rate environment, QE)
The concept that market forces in the macroeconomy can remedy a recession is referred to as: Keynesianism: the use of expansive fiscal and monetary policies to resolve a recession. The self-correcting mechanism The consumption function The paradox of thrift

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Statements	True	False
Countries with strong balance sheets and declining budget deficits tend to have lower interest rates.
When the economy is weakening, the Fed is likely to increase short-term interest rates.
Long-term interest rates are not as sensitive to booms and recessions as are short-term interest rates.
The Federal Reserve Board has a significant influence over the level of economic activity, inflation, interest rates in the United States.