Following a decline in the quantity of real money balances supplied, equilibrium is restored in the money market by
A)a rise in the price level.
B)a decline in the price level.
C)a decline in the quantity of money demanded.
D)a decline in the current level of output.

Question

Quizplus · Accepted Answer

A decline in the quantity of real money balances supplied will lead to an excess demand for money, causing the interest rate to rise. This increase in the interest rate will lead to a decrease in the quantity of money demanded, eventually restoring equilibrium in the money market. A and B are incorrect because changes in the price level are not directly related to changes in the money supply or demand. D is also incorrect as there is no mention of output affecting the money market equilibrium in this scenario.

Following a Decline in the Quantity of Real Money Balances