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Figure: Money Market I
-(Figure: Money Market I) Look at the figure Money Market I. If the money market is initially in equilibrium at point E and the central bank buys Treasury bills, then the interest rate will:

Question

Use the following to answer questions :
Figure: Money Market I 
-(Figure: Money Market I) Look at the figure Money Market I. If the money market is initially in equilibrium at point E and the central bank buys Treasury bills, then the interest rate will:

Quizplus · Accepted Answer

When the central bank buys Treasury bills, the money supply in the market increases, leading to a surplus of money demanding borrowers. To get rid of this surplus, borrowers will lower the interest rate they are willing to pay. As a result, the equilibrium point moves toward the lower side of interest rates, which is point L.

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