Exhibit 20-1 Money market demand and supply curves Starting from an equilibrium at E₁ in Exhibit 20-1, a leftward shift of the money supply curve from MS₁ to MS₂ would cause an excess:

Question

Quizplus · Accepted Answer

A leftward shift of the money supply curve would cause a decrease in the supply of money at the original interest rate. Since the demand for money curve remains the same, this would create an excess demand for money, meaning people would want to hold more money than is available. To acquire the additional money they desire, they would need to sell bonds, which would decrease the price of bonds and increase interest rates. This is consistent with choice A, as people would sell bonds to raise money to meet their excess demand for money.

Exhibit 20-1 Money Market Demand and Supply Curves Starting from an Equilibrium