Assume that there is an increase in perceived bankruptcy risk.As a result of this we would expect to see
A)income and interest rates to rise.
B)money demand and interest rates to fall.
C)money demand and interest rates to rise.
D)money supply to rise and interest rates to fall.

Question

Quizplus · Accepted Answer

An increase in perceived bankruptcy risk typically leads to a decrease in confidence in the financial markets and subsequently, an increase in the demand for money. As such, individuals and firms may start to hoard cash instead of investing in riskier assets, leading to an increase in the demand for money. This, in turn, puts upward pressure on interest rates. Therefore, the correct answer is C) money demand and interest rates to rise. Income and money supply are not necessarily affected by changes in perceived bankruptcy risk.

Assume That There Is an Increase in Perceived Bankruptcy Risk