Suppose the equilibrium interest rate in the money market is 3 percent and the current interest rate is 5 percent. As a result
A) the interest rate rises.
B) real GDP increases.
C) the demand for money curve shifts rightward.
D) people buy bonds and the interest rate falls.

Question

Quizplus · Accepted Answer

When the current interest rate is higher than the equilibrium interest rate, people will buy bonds to take advantage of the higher returns. As demand for bonds increases, their prices go up, and the interest rates, which move inversely to bond prices, fall. This adjustment process continues until the interest rate returns to its equilibrium level.

Suppose the Equilibrium Interest Rate in the Money Market Is