If at the prevailing interest rate the quantity of money demanded is $2 trillion, and the supply of money is $1.5 trillion, then which of the following is true ?
A) There is a shortage of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market.
B) There is a surplus of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market.
C) There is shortage of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market.
D) There is a surplus of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market.

Question

Quizplus · Accepted Answer

Since the quantity of money demanded ($2 trillion) is greater than the supply of money ($1.5 trillion), there is a shortage of money. To achieve an equilibrium in the money market and meet the demand for money, interest rates must rise, which will encourage people to save more and borrow less, thus decreasing the demand for money and increasing the supply of money until an equilibrium is reached. Therefore, answer choice C is the correct answer.

If at the Prevailing Interest Rate the Quantity of Money