If the demand for money and the supply of money both decrease, we can conclude that at the equilibrium:
A)interest rate will decline, but we cannot predict the change in the equilibrium quantity of money.
B)quantity of money and the equilibrium interest rate will both increase.
C)quantity of money will increase, but we cannot predict the change in the equilibrium interest rate.
D)quantity of money will decline, but we cannot predict the change in the equilibrium interest rate.

Question

Quizplus · Accepted Answer

If both demand and supply of money decrease, it means that people and businesses want to hold less money and the central bank is reducing the amount of money in circulation. This will lead to a decrease in the quantity of money in the economy. As for the interest rate, we cannot predict the change because it depends on the relative magnitude of the decrease in demand and supply of money. If the decrease in demand is larger, interest rates will rise; if the decrease in supply is larger, interest rates will fall.

If the Demand for Money and the Supply of Money