Refer to the given market-for-money diagrams. If the interest rate was at 3 percent, people would
A) sell bonds, which would cause bond prices to fall and the interest rate to rise.
B) buy bonds, which would cause bond prices to fall and the interest rate to rise.
C) sell bonds, which would cause bond prices to rise and the interest rate to rise.
D) buy bonds, which would cause bond prices to rise but have an uncertain effect upon the interest rate.

Question

Refer to the given market-for-money diagrams. If the interest rate was at 3 percent, people would
A) sell bonds, which would cause bond prices to fall and the interest rate to rise. 
B) buy bonds, which would cause bond prices to fall and the interest rate to rise. 
C) sell bonds, which would cause bond prices to rise and the interest rate to rise. 
D) buy bonds, which would cause bond prices to rise but have an uncertain effect upon the interest rate.

Quizplus · Accepted Answer

According to the market-for-money diagram, at an interest rate of 3 percent, the equilibrium quantity of money demanded exceeds the quantity of money supplied, which creates an excess demand for money. To acquire the needed funds, people will sell bonds, which will increase the supply of bonds and decrease their prices. As bond prices fall, the interest rate will rise to bring the market into equilibrium. Therefore, people will sell bonds, which will cause bond prices to fall and the interest rate to rise.

Refer to the Given Market-For-Money Diagrams