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 market for money diagram, the equilibrium interest rate is determined by the intersection of the money demand and money supply curves (i₀). An interest rate of i₃ is above this equilibrium level, indicating that the quantity of money demanded is less than the quantity of money supplied. As a result, individuals and firms will want to hold fewer bonds (which pay a fixed rate of return) and more money (which pays zero interest). This decrease in demand for bonds will put downward pressure on their prices, resulting in an increase in interest rates until equilibrium is reached at the original interest rate i₀. Therefore, Option C is the correct answer.

Refer to the Above Market for Money Diagram