An excess supply of money will cause people to buy securities, hence increasing their price and causing interest rates to fall. The lower interest rates eliminate the excess supply of money so that equilibrium in the money market is restored.

Question

Quizplus · Accepted Answer

When there is an excess supply of money, people have more money than they want to hold given the current interest rate. They are likely to invest this excess money in securities, which drives up the price of these securities. As the price of securities rises, their yield (or interest rate) falls. Lower interest rates make borrowing more attractive and saving less attractive, which increases spending and investment, thereby absorbing the excess supply of money and restoring equilibrium in the money market.

An Excess Supply of Money Will Cause People to Buy