Answer: both the expected growth rate of GDP and the expected volatility of GDP growth.

## Explanation The real default-free interest rate (often approximated by real government bond yields) is influenced by: **1. Expected GDP growth rate** - Higher expected economic growth typically leads to higher real interest rates because: - Increased investment opportunities - Higher demand for capital - Potential for higher returns **2. Expected volatility of GDP growth** - Higher economic volatility (risk) typically requires higher real interest rates because: - Investors demand compensation for economic uncertainty - Higher risk premium for holding long-term assets - Increased precautionary savings behavior **Correct Answer: C** - Both factors contribute positively to real interest rates. Higher growth creates demand for capital, while higher volatility creates risk that must be compensated.

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