Refer to the table below.If the transactions demand for money is $400 billion, an increase in the money supply from $800 billion to $900 billion would cause the equilibrium interest rate to:
A)rise to 7 percent.
B)rise to 6 percent.
C)fall to 4 percent.
D)remain at 5 percent.

Question

Refer to the table below.If the transactions demand for money is $400 billion, an increase in the money supply from $800 billion to $900 billion would cause the equilibrium interest rate to: 
A)rise to 7 percent. 
B)rise to 6 percent. 
C)fall to 4 percent. 
D)remain at 5 percent.

Quizplus · Accepted Answer

According to the table, at a money supply of $800 billion and a transactions demand for money of $400 billion, the equilibrium interest rate is 5%. However, if the money supply increases to $900 billion while the transactions demand for money remains at $400 billion, the excess supply of money will lead to a lower equilibrium interest rate. The table shows that at a money supply of $900 billion and a transactions demand for money of $400 billion, the equilibrium interest rate is 4%. Therefore, the equilibrium interest rate would fall to 4% if the money supply increased from $800 billion to $900 billion.

Refer to the Table Below