Consider the AD/AS Model with a Constant Rate of Inflation

question 11

Multiple Choice

Consider the AD/AS model with a constant rate of inflation.In this situation,the money supply is rising,which tends to reduce interest rates.However,interest rates are actually likely to remain stable.Why?

• A)Because the money transmission mechanism does not apply in a situation of sustained inflation.
• B)Because the rising price level is decreasing the demand for money which is pushing interest rates up.
• C)Because the declining interest rates cause the investment demand curve to shift to the right,which causes interest rates to rise.
• D)Because the rising price level is increasing the demand for money which tends to push interest rates up.
• E)Because the declining interest rates cause the investment demand curve to shift to the left,which causes interest rates to rise.

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Definitions:

10 ½% Bond

A bond that pays an annual interest rate of 10.5% to its holder.

Yield To Maturity

The total expected return on a bond if held until it matures, including interest payments and capital gains or losses.

Bond A

A classification of bond or debt security with specific features defined by the issuer, such as interest rate and maturity date.

Bond B

A specific category or issue of bonds, which are debt securities issued by corporations or governments to raise funds.