Suppose the Money Market Has an Equilibrium Interest Rate of 10

question 368

Multiple Choice

Suppose the money market has an equilibrium interest rate of 10 percent. If the actual interest is 8 percent, which of the following occurs to bring the money market back to equilibrium?

• A) People buy bonds, the price of bonds rises and the interest rate rises.
• B) People buy bonds, the price of bonds falls and the interest rate rises.
• C) People sell bonds, the price of bonds rises and the interest rate rises.
• D) People sell bonds, the price of bonds falls and the interest rate rises.

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Definitions:

Present Value

The present value of a future amount of money or series of cash flows using a given rate of return.

Interest Rate

The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan’s balance.

Acquisition Cost

The total cost incurred to acquire an asset, including the purchase price and additional expenses necessary to bring it to its intended use.

Present Value

The present value of a future amount of money or series of cash flows, considering a certain rate of return.