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

Question

Quizplus · Accepted Answer

A reduction in income implies a reduction in the purchasing power of individuals, which lowers the demand for goods and services. This reduces the inflationary pressure in the economy, and the central bank responds by reducing the interest rate to stimulate spending and investment. A reduction in interest rate increases the demand for bonds, which causes an increase in bond prices. Therefore, a reduction in income causes an increase in bond prices and a reduction in the interest rate.

Based on Our Understanding of the Determinants of the Interest