Assume that the money market is initially in equilibrium. A decrease in the price level would result in _____ of money at the initial interest rate.
A) equilibrium
B) an excess demand
C) an excess supply
D) none of the above

Question

Quizplus · Accepted Answer

A decrease in the price level would result in a decrease in the demand for money as people would require less money to make the same amount of purchases. As a result, there would be an excess supply of money at the initial interest rate, and people would be willing to lend money at a lower interest rate to get rid of the excess money. This would continue until a new equilibrium is established at a lower interest rate.

Assume That the Money Market Is Initially in Equilibrium