A Decline in Real Output Causes the Demand for Real

question 20

Multiple Choice

A decline in real output causes the demand for real balances

• A)to rise and the interest rate to fall.
• B)to fall and the interest rate to rise.
• C)and the interest rate to fall.
• D)and the interest rate to rise.

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Definitions:

Zero-coupon Bond

A bond that does not pay periodic interest and is sold at a discount to its face value, with the full face value repaid at maturity.

Par Value

The nominal or face value of a bond, share of stock, or other financial instrument, as stated by the issuer.

Forward Interest Rate

Rate of interest for a future period that would equate the total return of a long-term bond with that of a strategy of rolling over shorter-term bonds.

Yield Curve

A graph that plots the interest rates at a set point in time of bonds having equal credit quality but differing maturity dates, typically used to predict economic changes.