When people are holding money in excess of their demand for real money balances ________.
A)the nominal interest rate will fall
B)they increase their purchases of goods and services
C)the central bank buys bonds to correct the imbalance
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

When people are holding money in excess of their demand, there is a surplus of money and a shortage of available goods and services for purchase. This puts downward pressure on the nominal interest rate as people try to get rid of their excess money by lending it out, causing the supply of loanable funds to increase relative to demand. As a result, borrowers have to offer lower interest rates to entice lenders to borrow from them. This lower interest rate encourages investment and borrowing, which helps correct the imbalance between money supply and demand.

When People Are Holding Money in Excess of Their Demand