In the market for money, an interest rate below equilibrium results in an excess ________money and the interest rate will ________.A) demand for; riseB) demand for; fallC) supply of; fallD) supply of; rise
Question
In the market for money, an interest rate below equilibrium results in an excess ________money and the interest rate will ________.A) demand for; riseB) demand for; fallC) supply of; fallD) supply of; rise
Solution
The correct answer is A) demand for; rise.
Here's why:
-
In the money market, the interest rate is determined by the supply and demand for money.
-
If the interest rate is set below the equilibrium level, the cost of borrowing is relatively low. This encourages more people to demand money (for example, to take out loans), so the demand for money increases.
-
However, the supply of money does not change. This creates an excess demand for money - in other words, there are more people wanting to borrow money than there is money available to be borrowed.
-
In response to this excess demand, the interest rate will rise. This is because lenders can charge more for their limited funds, and because higher interest rates discourage some people from borrowing, which helps to reduce the excess demand.
So, an interest rate below equilibrium results in an excess demand for money, and the interest rate will rise.
Similar Questions
If the interest rate is currently higher than the equilibrium rate, money supply _____ money demanded and there is a resulting ______ in the money market.Multiple choice question.is less than; surplusis less than; shortageexceeds; shortageexceeds; surplus
Suppose there is an increase in the total demand for money. In this case, themultiple choiceequilibrium interest rate will fall.money supply will fall.money supply will riseequilibrium interest rate will rise.
An increase in the interest rateA) increases the demand for money.B) increases the quantity of money demanded.C) decreases the demand for money.D) decreases the quantity of money demanded.
An increase in the money supply, all else held constant, usually _____. increases the interest rate and increases aggregate demand decreases the interest rate and increases aggregate demand decreases the interest rate and decreases aggregate demand increases the interest rate and decreases aggregate demand
Equilibrium between the quantity of money demanded and the quantity of money supplied determines the quantity of money and the ______ rate.Multiple choice question.interesttaxinflationeconomic growth
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.