When the general interest rate reaches a very low level, which of the following statements will be correct?
Show answer & explanation
Correct answer: A
Explanation
The correct answer is option 1 i.e. Most people will expect the interest rate to rise in the future.
When the general interest rate reaches a very low level, most people will expect the interest rate to rise in the future because they anticipate that the central bank will try to stimulate the economy by increasing interest rates.
As a result, most people will prefer to hold cash or short-term securities rather than long-term bonds because the latter are more sensitive to changes in interest rates and may lose value if rates rise.