Exhibit 15.2

-Exhibit 15.2 shows equilibrium in a money market. Which of the following will be observed if the money supply curve shifts from S to S* while the rate of interest remains at "r"?

Question

Exhibit 15.2
 
-Exhibit 15.2 shows equilibrium in a money market. Which of the following will be observed if the money supply curve shifts from S to S* while the rate of interest remains at "r"?

Quizplus · Accepted Answer

If the money supply curve shifts from S to S*, the equilibrium interest rate will increase from "r" to "r*". This is because the increase in the money supply will lower the cost of borrowing, which will increase the quantity of money demanded. At the initial interest rate of "r", the quantity of money supplied will exceed the quantity demanded, creating an excess supply of money. To eliminate this excess supply, individuals will lower their demand for money by buying more goods and services, which will increase the price level. This increase in the price level will cause the real money supply to decrease and the real money demand to increase, which will increase the equilibrium interest rate to "r*". Therefore, there will be an excess demand for money at the initial interest rate of "r".

Exhibit 15.2 -Exhibit 15.2 Shows Equilibrium in a Money Market. Which of Money