30-Year Treasury Yield Hits Highest Level Since 2007

Answer the following questions to check your understanding of the story.

How does a higher expected inflation rate influence short-term and long-term interest rates?

A higher expected inflation rate _______________.

a) raises the short-term and long-term nominal interest rates

b) raises the short-term nominal interest rate and doesn’t change the long-term nominal interest rate

c) doesn’t change the short-term or long-term nominal interest rates

d) doesn’t change the short-term nominal interest rate and raises the long-term nominal interest rate

Wrong! - What is the relationship between the nominal interest rate, the real interest rate, and the expected inflation rate? Does this relationship hold in both the short run and the long run?

That's Right! - The nominal interest rate equals the real interest rate plus the expected inflation rate. A rise in the expected inflation rate raises short-term and long-term nominal interest rates.

Why does a higher expected inflation rate change the long-term interest rate?

A higher expected inflation rate ___________ and the long-term interest rate rises.

a) decreases the demand for long-term bonds, which lowers their price

b) decreases the supply of long-term bonds, which raises their price

c) increases the demand for long-term bonds, which raises their price

d) increases the supply of long-term bonds, which lowers their price

Wrong! - What happens in the long-term bond market if bond investors are unwilling to commit funds for long periods because higher interest rates will be available in the short term?

Good Job! - Bond investors are less willing to commit funds for long periods when rising expected inflation suggests that higher interest rates in the short term will be available. The demand for long-term bonds decreases, the price falls, and the long-term interest rate rises.

Does the government fiscal deficit and corporate AI investment influence the real interest rate?

a) The supply of loanable funds decreases, and the real interest rate rises.

b) The demand for loanable funds increases by the same amount as the supply of loanable funds increases, and the real interest rate is unchanged.

c) The real interest rate rises only because the inflation rate rises, not because of a government fiscal deficit or corporate AI investment.

d) The demand for loanable funds increases, and the real interest rate rises.

Wrong! - The government funds its deficit and corporations fund their investment through the loanable funds market. What happens in the loanable funds market?

Well Done! - The government funds its deficit and corporations fund their investment through the loanable funds market. The demand for loanable funds increases and the real interest rate rises.

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