Suppose the money market has an equilibrium interest rate of 10 percent. If the actual interest is 8 percent, the quantity of money demanded is greater than the quantity of money supplied. Which of the following occurs to bring the money market back to equilibrium?

Question

Quizplus · Accepted Answer

When the actual interest rate is lower than the equilibrium interest rate, quantity demanded exceeds quantity supplied. To bring the market back to equilibrium, people will sell bonds, which decreases the quantity of money demanded and increases the quantity of money supplied. This drives down the price of bonds and raises the interest rate until the equilibrium point is reached. Therefore, the correct option is C- people sell bonds, the price of bonds falls and the interest rate rises. A, B, and D are incorrect as they imply an increase in the price of bonds, which is inconsistent with the adjustment process.

Suppose the Money Market Has an Equilibrium Interest Rate of 10