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Figure: Money Market I
-(Figure: Money Market I) Refer to Figure: Money Market I. If the money market is initially in equilibrium at point E and the central bank sells Treasury bills, then the interest rate will:
A) move toward rH.
B) move toward rL
C) remain at rE.
D) shift rightward.

Question

Use the following to answer questions:
Figure: Money Market I 
-(Figure: Money Market I) Refer to Figure: Money Market I. If the money market is initially in equilibrium at point E and the central bank sells Treasury bills, then the interest rate will:
A) move toward rH. 
B) move toward rL 
C) remain at rE. 
D) shift rightward.

Quizplus · Accepted Answer

Selling Treasury bills by the central bank reduces the money supply, leading to a leftward shift in the money supply curve. This causes the equilibrium interest rate to increase, moving toward rH.

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