If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2%, the quantity of money demanded is _____ than quantity of money supplied.
A) less than
B) greater than
C) equal to
D) It is impossible to predict which is greater, money demanded or money supplied.

Question

Quizplus · Accepted Answer

At an interest rate of 2%, the lower interest rate encourages people to borrow more and save less. As a result, the quantity of money demanded increases. However, at the lower interest rate, the quantity of money supplied decreases because people are less willing to save their money. Therefore, the quantity of money demanded is greater than the quantity of money supplied.

If the Equilibrium Interest Rate in the Money Market Is