Interest rates typically follow a _ (procyclincal; countercyclincal) pattern relative to economic activity and the default premium typically follows a _ (procyclincal; countercyclincal) pattern relative to economic activity

Business Dec 23, 2020

Interest rates typically follow a _____ (procyclincal; countercyclincal) pattern relative to economic activity and the default premium typically follows a _____ (procyclincal; countercyclincal) pattern relative to economic activity.

Expert Solution

Answer: procyclincal, countercyclincal

Interest rates are lowered by the central bank during a recession and raised during a recovery. Thus, interest rates are positively correlated to economic growth and therefore are procyclincal. Default premiums rise during a recession as the risk of default rises due to a lack of demand. The default premium then falls as the economy recovers. Thus, the default premium is countercyclincal.

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