Suppose that the interest rate is greater than the equilibrium interest rate. Which of the following statements is true?
I. There is an excess quantity of money.
II. The quantity of money automatically increases.
III. The interest rate falls.
A)I only
B)II only
C)III only
D)I and III only
E)None of the above statements are true.

Question

Quizplus · Accepted Answer

If the interest rate is greater than the equilibrium interest rate, it means that the demand for money is lower than the supply. As a result, there is an excess quantity of money (statement I is true). To get rid of the excess money, people will try to spend more, leading to an increase in aggregate demand. This increase in demand will encourage firms to invest more, which will cause the demand for money to increase, and the interest rate to fall (statement III is true). Statement II is not true because the quantity of money does not automatically increase in this scenario.

Suppose That the Interest Rate Is Greater Than the Equilibrium