Based on the model of the money market, if prices in the economy decrease, the equilibrium interest rate should
A) stay the same.
B) increase.
C) decrease.
D) increase to the same extent that the supply of money increases.

Question

Quizplus · Accepted Answer

According to the model of the money market, a decrease in prices causes a decrease in the demand for money, as individuals need less money to purchase goods and services. Thus, there is an excess supply of money in the market, which puts downward pressure on the equilibrium interest rate. As a result, the equilibrium interest rate should decrease.

Based on the Model of the Money Market, If Prices