When a municipal bond is given tax-free status,the demand for municipal bonds shifts ________,causing the interest rate on the bond to ________.
A) leftward; rise
B) leftward; fall
C) rightward; rise
D) rightward; fall

Question

Quizplus · Accepted Answer

When a municipal bond is given tax-free status, it becomes more attractive to investors because the interest income is exempt from federal (and in some cases, state and local) taxes. This increased attractiveness leads to a higher demand for municipal bonds, shifting the demand curve rightward. As demand increases, the price of the bonds goes up, and the interest rate, which moves inversely to bond prices, falls.

When a Municipal Bond Is Given Tax-Free Status,the Demand for Municipal