If the speculative demand for money and nominal money supply are fixed, interest rate will vary directly with changes in income. If the income increases, the interest rate will rise. When the interest rate rises, people will need more money for transactions purpose. Since the money supply is fixed, people will increase their transactions money balances by reducing their speculative money balances. They do so by selling their interest bearing securities. Disposal of bonds leads to bond prices falling while the interest rate increases.
Dana05 answered the question on August 14, 2019 at 07:27
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