An increase in the market interest rate is likely to

Question

Quizplus · Accepted Answer

An increase in the market interest rate would lead to a decrease in demand for real assets as they become relatively more expensive compared to financial assets. An increase in the interest rate would also lead to a decrease in demand for real money balances as the opportunity cost of holding money (foregone interest) increases. However, an increase in the interest rate would lead to an increase in demand for nonmonetary financial assets such as stocks and bonds, as they offer higher returns. Therefore, C is the correct choice.

An Increase in the Market Interest Rate Is Likely to