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

Question

Quizplus · Accepted Answer

When people buy bonds to rid themselves of surplus money, the increased demand for bonds raises their prices, which in turn lowers interest rates, eliminating the surplus.

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