Question

Which of the following is a true statement?

a. any increase in IR will decrease bond price,
b. any decrease in IR will decrease bond price,
c. any increase in IR will decrease bond price,
d. there is

Answer 1

A fall in supply in the financial market will lead to a decline in interest rates.

Step-by-step explanation:

The correct answer to the question is d. a fall in supply. A decrease in the supply of loans will lead to a decline in interest rates. This is because a decrease in supply means there are fewer loans available, which increases competition among borrowers and leads to lower interest rates.

For example, if banks reduce lending due to stricter regulations or a decrease in available funds, the supply of loans decreases. As a result, borrowers have fewer options, and lenders must offer more competitive interest rates to attract borrowers.

Therefore, a fall in supply in the financial market will lead to a decline in interest rates.

Answer 2

A decline in interest rates occurs with a rise in supply of money, while an increase in the quantity of loans correlates with a rise in demand for loans or a rise in supply of money available for lending.

Step-by-step explanation:

The financial market experiences changes in interest rates due to various factors, including changes in supply and demand for money. For interest rates to decline, there must be a rise in supply of money. This scenario occurs when there are more funds available for lending, which in turn reduces the price to borrow money, namely the interest rate. Conversely, an increase in demand while supply remains constant or decreases could lead to higher interest rates as borrowers are willing to pay more for the limited available funds.

In terms of the quantity of loans made and received, an increase would be expected if there is either a rise in demand for loans, with borrowers seeking more funds, or a rise in supply, with lenders having more funds to offer. Both conditions can lead to more loans being transacted in the financial market.