Question

If people expect interest rates to rise in the future, how will they change the quantity of money they demand? Explain your answer. People will the amount of money they hold, and bonds, if they expect interest rates to rise in the future because the price of those bonds will be .

Answer 1

If interest rise, the price of bonds will decrease, therefore if people are expecting an increase in the interest rates, they will start to sell their bonds before their prices lower. This will increase the amount of money they hold and people will not invest in bonds until the interest rates actually increase and the price of bonds decrease.