Suppose that households became mistrustful of the banking system and decide to decrease their checking accounts and increase their holdings of currency.Using the money demand and money supply model and assuming everything else is held constant,the equilibrium interest rate should
A)increase.
B)decrease.
C)not change.
D)increase,then decrease.

Question

Quizplus · Accepted Answer

If households decrease their checking accounts and increase their holdings of currency, the money supply decreases. This leads to a decrease in the quantity of money in circulation, causing an increase in the demand for money. As a result, the interest rate has to increase to equate the money supply with the money demand.

Suppose That Households Became Mistrustful of the Banking System and Decide