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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

Which of the following Fed actions will increase bank lending?

Select one or moreanswers from the choices shown.

a. The Fed raises the discount rate from 5 percent to 6 percent.

b. The Fed raises the reserve ratio from 10 percent to 11 percent.

c. The Fed lowers the discount rate from 4 percent to 2 percent.

d. The Fed sells bonds to commercial banks.

Suppose a bond with no expiration date has a face value of \(10,000 and annually pays \)800 in fixed interest. In the table provided below, calculate and enter either the interest rate that the bond would yield to a bond buyer at each of the bond prices listed or the bond price at each of the interest yields shown. What generalization can you draw from the completed table?

Bond Price

\( 8,000

Interest Yield, %

________

______

8.9

\)10,000

$11,000

_______

________

________

6.2

What are the components affected in a contractionary monetary policy?

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?

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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