As the interest rate falls, people become more willing to hold money until, at the equilibrium interest rate, people are happy
A)to demand the central bank issues more money.
B)to hold exactly the amount of money the central bank has supplied.
C)to demand less than the amount of money the central bank has supplied.
D)to demand more than the amount of money the central bank has supplied.

Question

Quizplus · Accepted Answer

As the interest rate falls, the opportunity cost of holding money decreases, making people more willing to hold money. At the equilibrium interest rate, the demand for money matches the supply of money, which means people are willing to hold exactly the amount of money that the central bank has supplied. Therefore, choice B is the best answer. Option A is incorrect because at the equilibrium interest rate, people do not want the central bank to issue more money. Option C is incorrect because demand for money equals the supply of money at the equilibrium interest rate, meaning people only demand the same amount of money that the central bank has supplied. Option D is incorrect because people only demand the same amount of money that the central bank has supplied at the equilibrium interest rate.

As the Interest Rate Falls, People Become More Willing to Hold