Refer to the above market for money diagram.Given D_m and S_m, an interest rate of i₃ is not sustainable because: A)the supply of bonds in the bond market will decline and the interest rate will rise. B)the supply of bonds in the bond market will increase and the interest rate will decline. C)the demand for bonds in the bond market will decline and the interest rate will rise. D)the demand for bonds in the bond market will rise and the interest rate will fall.

Question

Quizplus · Accepted Answer

In the given scenario with D_m and S_m, an interest rate of i₃ is not sustainable because it is above the equilibrium interest rate. This will cause the demand for bonds in the bond market to decline as people will prefer to save in interest-bearing bank deposits rather than investing in bonds. This decrease in demand for bonds will result in an excess supply of bonds in the bond market which will put pressure on bond prices, causing the interest rates to rise. Therefore, option C is the correct answer.

Refer to the Above Market for Money Diagram