Suppose the Fed increases the money supply.Which of the following is true?
A)At the original interest rate,the quantity of money demanded is equal to the quantity of money supplied.
B)At the original interest rate,the quantity of money demanded is less than the quantity of money supplied.
C)At the original interest rate,the quantity of money demanded is greater than the quantity of money supplied.
D)The interest rate must rise for the money market to clear.

Question

Quizplus · Accepted Answer

When the Fed increases the money supply, the supply of money in the market increases. At the existing interest rate, the quantity of money demanded will be less than the quantity of money supplied, resulting in excess supply. This will create downward pressure on interest rates, as lenders will compete to offer loans to borrowers. As interest rates continue to fall, demand for money will increase, and the market will eventually clear. Thus, the correct answer is B - "At the original interest rate, the quantity of money demanded is less than the quantity of money supplied."

Suppose the Fed Increases the Money Supply