When the money market is depicted in a diagram with the value of money on the vertical axis, which of the following best describes the effects of an increase in money supply?
A)The equilibrium value and equilibrium quantity of money both increase.
B)The equilibrium value and equilibrium quantity of money both decrease.
C)The equilibrium value increases, while the equilibrium quantity of money decreases.
D)The equilibrium value decreases, while the equilibrium quantity of money increases.

Question

Quizplus · Accepted Answer

When the money supply increases, the demand for money decreases, leading to a surplus of money in the market. This surplus pushes down the value of money (i.e., its purchasing power), resulting in a decrease in equilibrium value. However, with the surplus of money available in the market, people are willing to hold more money, leading to an increase in equilibrium quantity of money. Therefore, the correct option is D, where the equilibrium value decreases, while the equilibrium quantity of money increases.

When the Money Market Is Depicted in a Diagram with the Value