If the nominal interest rate is less than the equilibrium nominal interest rate determined in the money market, then households and firms
A) are holding more money than they prefer.
B) are holding less money than they prefer.
C) expect the nominal interest rate to decrease.
D) expect the price level to increase.
E) expect real GDP to increase.

Question

Quizplus · Accepted Answer

When the nominal interest rate is below the equilibrium rate, households and firms hold less money than they prefer, leading them to increase their money holdings, which puts upward pressure on the interest rate.

If the Nominal Interest Rate Is Less Than the Equilibrium