Figure 4.4

-In Figure 4.4,the most likely cause of the increase in the equilibrium interest rate from i? to i? is
A) an increase in the price of bonds.
B) a business cycle boom.
C) an increase in the expected inflation rate.
D) a decrease in the expected inflation rate.

Question

Figure 4.4
 
-In Figure 4.4,the most likely cause of the increase in the equilibrium interest rate from i? to i? is
A) an increase in the price of bonds. 
B) a business cycle boom. 
C) an increase in the expected inflation rate. 
D) a decrease in the expected inflation rate.

Quizplus · Accepted Answer

An increase in the expected inflation rate would shift the demand curve for bonds to the left, causing the equilibrium interest rate to increase from i? to i?. This is because investors would demand a higher interest rate to compensate for the expected loss in purchasing power due to inflation. A decrease in the expected inflation rate would shift the demand curve for bonds to the right, causing the equilibrium interest rate to decrease. A business cycle boom or an increase in the price of bonds would not directly cause an increase in the equilibrium interest rate.

Figure 4.4 -In Figure 4.4,the Most Likely Cause of the Increase in of the Increase