If the interest rate is below the equilibrium interest rate, how is equilibrium achieved in the money market?
A)People sell goods to try to raise more money, lowering the price of goods and raising the interest rate.
B)People buy bonds to get rid of their excess money, raising the price of bonds and raising the interest rate.
C)People sell bonds to try to raise more money, raising the price of bonds and lowering the interest rate.
D)People sell bonds to try to raise more money, lowering the price of bonds and raising the interest rate.
E)People buy goods to get rid of their excess money, lowering the price of goods and raising the interest rate.

Question

Quizplus · Accepted Answer

When the interest rate is below the equilibrium, there is excess demand for money. People sell bonds to obtain more money, which increases the supply of bonds in the market, lowering their price. As bond prices fall, their yields (interest rates) increase, moving the interest rate towards equilibrium.

If the Interest Rate Is Below the Equilibrium Interest Rate