Based on our understanding of the determinants of the interest rate and bond prices, we know that a decrease in income will cause:

Question

Quizplus · Accepted Answer

A decrease in income is likely to lead to a decrease in demand for goods and services, which in turn causes a decrease in inflationary pressures. This would generally lead to a decrease in interest rates (i) which would then result in an increase in bond prices. Therefore, choice D (an increase in bond prices and a decrease in i) is the best choice.

Based on Our Understanding of the Determinants of the Interest