Question

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2% sellers of interest-bearing financial assets _____ interest rates to find willing buyers. Sales of financial assets do not depend on the rate offered. must offer higher can offer 2% can offer lower

Answer 1

Answer: must offer higher

Explanation:

The financial world of investment is inter-correlated and products can sometimes be substitutes for one another. What this means is that if one financial product is not offering enough return on investment or is risky or for any other reason shakes their confidence in it, then investors tend to run to financial products that are perceived as better.

This is why when interest rates are stable and stocks are volatile, stock markets tend to lose value and bond markets sometimes gain value as investors leave the stock market and come to the bond market.

In the scenario described, the interest rate in the money market is 5%. If interest bearing financial assets are only at 2%, investors will leave/ not invest in those interest bearing bonds because the rate is lower. The sellers of such assets will therefore have to make them more attractive by increasing the the interest rates to find willing buyers.