In the money market, if the interest rate exceeds the equilibrium interest, there is a surplus of money. How is the surplus eliminated?
A) The Federal Reserve will destroy currency, reducing the quantity of money.
B) People buy bonds to rid themselves of the surplus money, bidding up their price and pushing interest rates down.
C) Banks will lend out the surplus, lowering interest rates.
D) The high interest rate increases the demand for money, eliminating the surplus.

Question

Quizplus · Accepted Answer

When there is a surplus of money in the money market, people will try to get rid of the excess money by buying bonds. As the demand for bonds increases, their prices go up and interest rates go down, eventually reaching the equilibrium interest rate. Therefore, buying bonds is the best way to eliminate the surplus of money in the money market. The other options listed are not effective or indirect ways of eliminating the surplus of money.

In the Money Market, If the Interest Rate Exceeds the Equilibrium