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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 buys Treasury bills, then the interest rate will:

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 buys Treasury bills, then the interest rate will:

Quizplus · Accepted Answer

If the central bank buys Treasury bills, it increases the demand for them and reduces the supply of money in the market. This creates a shortage of money, which leads to an increase in the interest rate. As a result, the interest rate will move toward rL, which is the new equilibrium point where the supply of money and the demand for it will be equal again.

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