Suppose that the equilibrium nominal interest rate is 4 percent and the equilibrium quantity of money is $1 trillion. At any interest rate above 4 percent,
A) less than $1 trillion will be demanded and bond prices will increase.
B) less than $1 trillion will be demanded and bond prices will fall.
C) more than $1 trillion will be supplied and bond prices will fall.
D) more than $1 trillion will be supplied and the interest rate will rise.
E) there is a shortage of money and the interest rate will rise.

Question

Quizplus · Accepted Answer

At any interest rate above 4 percent, less than $1 trillion will be demanded. This is because people will be less likely to hold money when they can earn a higher return on other assets. As a result, bond prices will increase, as people will be willing to pay more for bonds that offer a fixed interest rate.

Suppose That the Equilibrium Nominal Interest Rate Is 4 Percent