If people are selling bonds, it causes the interest rate to:
A) rise and MD MS.
B) fall and MS MD.
C) fall and MD = MS.
D) The demand for money has fallen.

Question

If people are selling bonds, it causes the interest rate to:
A) rise and MD > MS.
B) fall and MS > MD.
C) fall and MD = MS.
D) The demand for money has fallen.

Quizplus · Accepted Answer

When people sell bonds, the supply of bonds increases in the market, which lowers their price. This decrease in bond prices causes the interest rate to rise. The rise in the interest rate leads to a decrease in the quantity of money demanded (MD) and an increase in the quantity of money supplied (MS), causing MD > MS. Therefore, option A is correct. Option B contradicts the cause-effect relationship, while option C is incorrect as it assumes that the change in supply does not impact the price of bonds in the market. Option D is also not accurate, as it is a partial answer and does not address the impact of bond sales on interest rates.

If People Are Selling Bonds, It Causes the Interest Rate