Suppose, real cash balance fraction (k) increases due to the lack of confidence in the financial market increases, while things remain the same. As a result, we will see:

Question

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When the real cash balance fraction (k) increases due to a lack of confidence in the financial markets, individuals prefer to hold more money relative to their investments. This leads to a decrease in the demand for bonds and stocks, increasing the interest rate as the price of borrowing money goes up. The other options do not directly result from an increase in k. Higher stock of money (A) is not a direct result of higher k; it's a policy response. Higher price of bonds (C) would occur if interest rates fell, which is the opposite of what happens when k increases. Lower stock of supply (D) is unrelated to changes in k.

Suppose, Real Cash Balance Fraction (K) Increases Due to the Lack