Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the money-demand curve is currently MD₂. If the current interest rate is r₂, then A)in response, the money-demand curve will shift downward from its current position to establish equilibrium in the money market. B)people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. C)bond issuers and banks will respond by lowering the interest rates they offer. D)there is a surplus of money.

Question

Quizplus · Accepted Answer

According to the graph, if the current interest rate is r₂ and the money-demand curve is MD₂, then there is an excess demand for money. People will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts, which will shift the money-supply curve to the right, thereby lowering the interest rate until equilibrium is reached where the money supply equals the money demand.