In the liquidity-preference model, if the nominal interest rate is higher than the equilibrium interest rate
A)both bond prices and nominal interest rate will eventually fall.
B)both bond prices and nominal interest rate will eventually rise further
C)bond prices will fall and nominal interest rate will eventually rise further
D)bond prices will rise and nominal interest rate will eventually fall.

Question

Quizplus · Accepted Answer

In the liquidity-preference model, if the nominal interest rate is higher than the equilibrium rate, it indicates an excess supply of money. People will buy bonds to rid themselves of the excess money, driving up bond prices. As bond prices rise, their yields (or nominal interest rates) fall, moving towards equilibrium.

In the Liquidity-Preference Model, If the Nominal Interest Rate Is