Suppose the money market has an equilibrium interest rate of 10 percent. If the actual interest is 8 percent, which of the following occurs to bring the money market back to equilibrium?
A) People sell bonds, the price of bonds falls and the interest rate rises.
B) People sell bonds, the price of bonds rises and the interest rate rises.
C) People buy bonds, the price of bonds rises and the interest rate rises.
D) People buy bonds, the price of bonds falls and the interest rate rises.

Question

Quizplus · Accepted Answer

When the actual interest rate is below the equilibrium rate, people will sell bonds to hold more money, causing bond prices to fall and interest rates to rise back to equilibrium.

Suppose the Money Market Has an Equilibrium Interest Rate of 10