Use the following to answer questions:
Figure: Money Market I
-(Figure: Money Market I) Refer to Figure: Money Market I. If the interest rate is at r_L and the central bank neither buys nor sells 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 interest rate is at r_L and the central bank neither buys nor sells Treasury bills, then the interest rate will:

Quizplus · Accepted Answer

The interest rate will move toward rE because that is the equilibrium interest rate where the quantity of money demanded equals the quantity of money supplied. Without intervention from the central bank, the market forces will naturally adjust to reach this equilibrium.

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