When the Price Level Falls,the ________ Curve for Nominal Money

question 110

Multiple Choice

When the price level falls,the ________ curve for nominal money ________,and interest rates ________,everything else held constant.

• A) demand; decreases; fall
• B) demand; increases; rise
• C) supply; increases; rise
• D) supply; decreases; fall

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Definitions:

Real Rate

The real rate is the interest rate that has been adjusted for inflation, representing the true cost of borrowing or the real yield on an investment, distinct from the nominal rate.

Expectations Theory

A theory that suggests long-term interest rates reflect the market's expectation for future short-term rates, assuming that investors have no preference for long versus short maturities.

Liquidity Preference Theory

A theory ofthe shape of the yield curve. The curveslopes upward because, all other thing equal, investors prefer shorter, moreliquid investments. They must therefore be induced to lend longer withhigher rates

Market Segmentation Theory

A theory of the shape of the yield curve. The debt market is segmented by term, and each segment is independent of the others. Hence, the curve slopes up or down depending on supply and demand conditions in the various market segments.