An Increase in Interest Rates Causes the Demand for Money

question 29

Multiple Choice

An increase in interest rates causes the demand for money to:

• A) increase.
• B) decrease.
• C) stay the same.
• D) shift to the right.

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Definitions:

Return

The gain or loss on an investment over a specified period, expressed as a percentage increase over the initial investment cost.

Zero Coupon

A type of bond that does not pay periodic interest payments but instead is sold at a deep discount from its face value and pays its full face value at maturity.

Imputed Interest

The assumed interest rate used by the IRS for tax purposes on loans with little or no interest, to ensure that tax is collected on essentially interest-free loans.

Call Provision

A clause in a bond's contract that allows the issuer to redeem the bond before its maturity date under specific conditions.