Use the following figure to answer the question :

-In the figure above,the decrease in the interest rate from i1 to i2 can be explained by
A)a decrease in money growth.
B)a decline in the expected price level.
C)an increase in income.
D)an increase in the expected price level.

Question

Use the following figure to answer the question :

-In the figure above,the decrease in the interest rate from i1 to i2 can be explained by
A)a decrease in money growth. 
B)a decline in the expected price level. 
C)an increase in income. 
D)an increase in the expected price level.

Quizplus · Accepted Answer

A decrease in the expected price level (deflation) would lead to a decrease in the nominal interest rate, as lenders and borrowers would require lower compensation for the decreased inflation risk. A decrease in money growth (monetary contraction) would potentially lead to an increase in nominal interest rates, as the reduced money supply would make it more expensive to borrow. An increase in income would potentially lead to an increase in nominal interest rates, as the increased demand for loans would drive up interest rates. An increase in the expected price level (inflation) would potentially lead to an increase in nominal interest rates, as lenders and borrowers would require higher compensation for the increased inflation risk.

Use the Following Figure to Answer the Question