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

Question

Quizplus · Accepted Answer

According to the liquidity-preference model, if the nominal interest rate is lower than the equilibrium interest rate, there is excess demand for money, which leads people to sell bonds to hold onto cash. This excess supply of bonds causes bond prices to fall, which drives up the nominal interest rate to the equilibrium level. Therefore, bond prices will fall and nominal interest rates will eventually rise.

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