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Chapter 16: Q1. (page 347)

When bond prices go up, interest rates go _______.

a. up

b. down

c. nowhere

Short Answer

Expert verified

The correct option, in this case, will be ‘b).down’.

Step by step solution

01

Step 1. Explanation for the correct option

The bond prices and the interest rates are known to have an inverse relationship with each other. The reason for it is that if it becomes easy for people to borrow, it reduces the cost of borrowing or interest rates. They demand more money to make sure that the economy does not go into a liquidity trap and the bond prices rise.

02

Step 2. Explanation for the incorrect options

Interest rates and bond prices have an inverse relationship. The interest rates go up only when the price of bonds decreases. So, option a is incorrect.

This is incorrect because the interest rates and bond prices influence one another. So, when the interest rate goes down, the price of the bond increases and vice versa. So, option c is incorrect.

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Most popular questions from this chapter

What is the basic objective of monetary policy? What are the major strengths of monetary policy? Why is monetary policy easier to conduct than fiscal policy?

Who are the MPC?

True or False: In the United States, monetary policy has two key advantages over fiscal policy: (1) isolation from political pressure and (2) speed and flexibility.

Refer to the table for Moola below to answer the following questions. What is the equilibrium interest rate in Moola? What is the level of investment at the equilibrium interest rate? Is there either a recessionary output gap (negative GDP gap) or an inflationary output gap (positive GDP gap) at the equilibrium interest rate, and, if either, what is the amount? Given money demand, by how much would the Moola central bank need to change the money supply to close the output gap? What is the expenditure multiplier in Moola?

Money Supply (\()

Money Demand (\))

Interest Rate (%)

Investment at Interest Rate Shown (\()

Potential Real GDP (\))

Actual Real GDP at Interest

(Rate Shown) ($)

500

500

500

500

500

800

700

600

500

400

2

3

4

5

6

50

40

30

20

10

350

350

350

350

350

390

370

350

330

310

Assume that the following data characterize the hypothetical economy of Trance: money supply = \(200 billion; quantity of money demanded for transactions = \)150 billion; quantity of money demanded as an asset = \(10 billion at 12 percent interest, increasing by \)10 billion for each 2-percentage-point fall in the interest rate.

a. What is the equilibrium interest rate in Trance?

b. At the equilibrium interest rate, what are the quantity of money supplied, the quantity of money demanded, the amount of money demanded for transactions, and the amount of money demanded as an asset in Trance?
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