The figure given below shows equilibrium in a money market.Which of the following will be observed if the money supply curve shifts from S to S' while the rate of interest remains at "r"?

A)There will be an excess demand for money.
B)There will be an excess supply of money.
C)The Fed will buy U.S.Treasury securities.
D)The quantity of money demanded will fall.
E)The quantity of money supplied will fall.

Question

The figure given below shows equilibrium in a money market.Which of the following will be observed if the money supply curve shifts from S to S' while the rate of interest remains at "r"?

A)There will be an excess demand for money. 
B)There will be an excess supply of money. 
C)The Fed will buy U.S.Treasury securities. 
D)The quantity of money demanded will fall. 
E)The quantity of money supplied will fall.

Quizplus · Accepted Answer

The equilibrium interest rate is determined at the intersection of the money supply and money demand curves. If the money supply curve shifts to the right (from S to S'), there will be an excess supply of money at the original interest rate. This will put downward pressure on the interest rate, causing it to fall until a new equilibrium is reached.

The Figure Given Below Shows Equilibrium in a Money Market