Question

iv. impact of interest rates on financial markets
match each aspect of the economy with how it’s affected by interest rates:
_____ saving and borrowing a. prices tend to fall when interest rates rise
_____ investment decisions b. becomes more attractive with higher rates
_____ stock market c. rates affect affordability and market activity
_____ housing market d. higher rates can make borrowing more costly
_____ currency values e. higher rates can lead to a stronger currency

v. true or false
_____ the federal reserve raises interest rates to slow down an overheating economy.
_____ higher interest rates generally lead to a stronger currency.
_____ when interest rates rise, stock prices tend to fall.
_____ lower interest rates usually make borrowing less expensive.
_____ the real interest rate takes inflation into account.

Explanation:

IV. Matching

• Saving and Borrowing: Higher interest rates make borrowing more costly (D) as the cost of loans increases, while saving becomes more attractive (but the option D directly relates to borrowing aspect here).
• Investment Decisions: Higher rates make saving more attractive (B) as returns on savings/investments (like bonds) rise, so investment in other assets may be compared.
• Stock Market: When interest rates rise, stock prices tend to fall (A) because alternative investments (like bonds) become more attractive, reducing demand for stocks.
• Housing Market: Interest rates affect mortgage affordability and thus market activity (C) – higher rates mean higher mortgage payments, reducing affordability.
• Currency Values: Higher rates attract foreign investment, leading to a stronger currency (E).

V. True or False

• The Federal Reserve raises interest rates to slow down an overheating economy: True. Raising rates reduces borrowing and spending, cooling the economy.
• Higher interest rates generally lead to a stronger currency: True. As explained, higher rates attract foreign capital, increasing demand for the currency.
• When interest rates rise, stock prices tend to fall: True. Opportunity cost of holding stocks increases (bonds yield more), so stock demand drops.
• Lower interest rates usually make borrowing less expensive: True. Lower rates mean lower interest payments on loans.
• The real interest rate takes inflation into account: True. Real interest rate = nominal rate - inflation rate.

Answer:

IV.

• Saving and Borrowing: D. Higher rates can make borrowing more costly
• Investment Decisions: B. Becomes more attractive with higher rates
• Stock Market: A. Prices tend to fall when interest rates rise
• Housing Market: C. Rates affect affordability and market activity
• Currency Values: E. Higher rates can lead to a stronger currency

V.

• The Federal Reserve raises interest rates to slow down an overheating economy: True
• Higher interest rates generally lead to a stronger currency: True
• When interest rates rise, stock prices tend to fall: True
• Lower interest rates usually make borrowing less expensive: True
• The real interest rate takes inflation into account: True