When the general interest rate reaches a very low level, which of the following statements will be correct?
- A.Most people will expect the interest rate to rise in the future.
- B.Most people will prefer to hold bonds.
- C.Most people will speculate a further decline in the rate of interest.
- D.Any increase in the money supply will cause the interest rate to fall further.
Correct answer
Explanation
The correct answer is A, Most people will expect the interest rate to rise in the future. When the rate of interest is already very low, people believe it can hardly fall further and must rise, so they hold cash instead of bonds. Keynes called this the speculative demand for money, and the extreme case, in which everyone prefers cash at a very low rate, is the liquidity trap. The reason lies in the link between bond prices and interest: when the rate rises, the price of existing bonds falls, so anyone holding bonds would suffer a capital loss. Option B is wrong because people avoid bonds at such a time for exactly that fear of loss. Option C is wrong because a further fall is what people stop expecting once the rate is near its floor. Option D is wrong because in a liquidity trap extra money is simply held as cash and leaves the interest rate unchanged. Exam tip: a very low interest rate means high speculative demand for money, which is the liquidity trap.
Practice Questions
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- A.improve
- B.diminish
- C.remain constant
- D.first diminish and then improve
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Each extra unit of a good gives a consumer less additional satisfaction than the unit before it, so marginal utility falls as consumption rises.
Read the full explanation →Consider the following statements about impact of tax : 1. A tax is shifted forward to consumers if the demand is inelastic relative to supply. 2. A tax is shifted backward to producers if the supply is relatively more inelastic than demand. Which of the statements given above is/are correct?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
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- A.Union Basic Income
- B.Undefined Basic Income
- C.Unconditional Basic Income
- D.Universal Basic Income
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UBI is the idea of paying every citizen a fixed sum of money regularly, without conditions, in place of a large number of separate subsidies and welfare schemes.
Read the full explanation →Who among the following is the Chairman of the Fourteenth Finance Commission?
- A.C. Rangarajan
- B.Vijay Kelkar
- C.Y. V. Reddy
- D.Rakesh Mohan
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The Fourteenth Finance Commission, set up in 2013 for the award period 2015-2020, was chaired by Y. V. Reddy, a former Governor of the Reserve Bank of India.
Read the full explanation →Why was constitutional amendment needed for introducing GST?
- A.States were not willing to agree with the Union for introduction of GST without amendment in the Constitution.
- B.GST was to be implemented on concurrent base and Article 246 was inadequate for such a case.
- C.The Empowered Committee of Finance Ministers had recommended for constitutional amendment.
- D.The GST Council had recommended for constitutional amendment so that its power enhances.
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