Question

Which of the following statements is true?

a)Assuming all else equal, if a household is optimistic about future income, it is likely to cause a left shift of the current credit demand curve of the household.

b)John makes it a point to save a portion of his salary every month. Assuming all else equal, if the real interest rate increases, it is likely to cause John's credit supply curve to shift to the left.

c)Everything else remaining unchanged, if households expect a recession in near future, it will cause the credit supply curve of households to shift to the right.

d)Everything else remaining unchanged, if firms tend to hold on to retained earnings instead of paying dividends, it is likely to shift the credit demand curve to the right.

Which of the following will happen if market interest rates fall at present?

a)The present value of future payments will decrease.

b)The quantity demanded of previously issued bonds will decrease.

c)The value of a previously issued bond will decreases.

d)The market price for current bonds will increase.

Answer 1

1) Everything else remaining unchanged, if household expect a recession in near future, it will cause the credit supply curve of households to see shift to right.

( Expectation of the recession will alter the spending behaviour of households. They will spend less and save more to meet the future crisis. So the credit supply curve will shift to right.)

2) The market price of current bonds will Increases.

( As Keynes explained, speculative demand for money is a function of rate of interest. Rate of interest has an inverse relationship with bonds. As rate of interest decreases, bond prices will increase as people will prefer to invest in securities .on the other hand if rate of interest Increases, bond prices will fall.)