Refer to the above market for money diagram.If the interest rate was at 3 percent, people would:
A)sell bonds, which would cause bond prices to fall and the interest rate to rise.
B)buy bonds, which would cause bond prices to fall and the interest rate to rise.
C)sell bonds, which would cause bond prices to rise and the interest rate to rise.
D)buy bonds, which would cause bond prices to rise but have an uncertain effect upon the interest rate.

Question

Refer to the above market for money diagram.If the interest rate was at 3 percent, people would:
A)sell bonds, which would cause bond prices to fall and the interest rate to rise. 
B)buy bonds, which would cause bond prices to fall and the interest rate to rise. 
C)sell bonds, which would cause bond prices to rise and the interest rate to rise. 
D)buy bonds, which would cause bond prices to rise but have an uncertain effect upon the interest rate.

Quizplus · Accepted Answer

At an interest rate of 3 percent, the equilibrium in the money market is not achieved as the quantity of money demanded is greater than the quantity supplied. This would prompt people to sell bonds to obtain the necessary funds, leading to an increase in the supply of bonds and a consequent fall in bond prices. As bond prices and interest rates are inversely related, the interest rate would rise to restore equilibrium in the market for money. Thus, the correct answer is A.

Refer to the Above Market for Money Diagram