Question

(a)    Derive a relationship between critical rate of interest and expected price of bonds.
(b)   Higher is the critical rate of interest lower is the speculative demand for money. True/false?

Answer 1

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Question:

Answer:

(a)    Derive a relationship between critical rate of interest and expected price of bonds.

Interest rate and bond price are  inversely related to each others. It menas when bond price increase bond price decrease and vice-versa. Its happen because investors sell existing bond that have comparatively low rate of return due to lower interset rate and buy the new bonds with comparatively higher interest rate. Suppose., It is expected that that the economy will move in positive direction further in coming quaters and central bank will increase interest rate then it will negatively affect the bond price and vice-versa.

b)   Higher is the critical rate of interest lower is the speculative demand for money. True/false?

True

Speculative demand for money is inversely related to the rate of interest. It means higher the rate of Interest, smaller the speculative demand for money and vice versa.

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