Interest rates increase or decrease so that an equilibrium exists in the money market.

Question

Quizplus · Accepted Answer

Interest rates play a critical role in achieving equilibrium in the money market. When there is excess supply of money, interest rates decrease to encourage borrowing and investing, which in turn increases demand for money. Conversely, when there is excess demand for money, interest rates increase to discourage borrowing and investing, which reduces demand for money until there is equilibrium in the market.

Interest Rates Increase or Decrease So That an Equilibrium Exists