Question

If expected inflation is constant, then when the nominal interest rate falls, the real interest rate O A. falls by more than the change in the nominal interest rate. falls by the change in the nominal interest rate. Oc rises by the change in the nominal interest rate. OD.rises by more than the change in the nominal interest rate. QUESTION 15 According to liquidity preference theory, if there were a surplus of money, then O A. the interest rate would be above equilibrium and the quantity of money demanded would be too large for equilibrium. the interest rate would be above equilibrium and the quantity of money demanded would be too small for equilibrium. OB C. the interest rate would be below equilibrium and the quantity of money demanded would be too small for equilibrium. D. the interest rate would be below equilibrium and the quantity of money demanded would be too large for equilibrium.

Answer 1

1) If expected inflation is constant then a fall in nominal interest rate will reduce real rate of interest because nominal interest rate = inflation rate + real interest rate

Option B is correct.

2) If there is a surplus of money, there would be less demand of money than supply of it. People will buy assets with high interest to reduce the rate of interest. Option B is correct.