Refer to the following figure when answering
Figure 12.12: Money Market
-Starting at any equilibrium in Figure 12.12, if individuals want to hold more wealth in savings, the money market would move from:
A) point B to A
B) point B to C
C) point B to D
D) point A to C
E) Not enough information is given.

Question

Refer to the following figure when answering  
Figure 12.12: Money Market 
-Starting at any equilibrium in Figure 12.12, if individuals want to hold more wealth in savings, the money market would move from:
A) point B to A 
B) point B to C 
C) point B to D 
D) point A to C 
E) Not enough information is given.

Quizplus · Accepted Answer

An increase in the demand for wealth in savings would result in an increase in the demand for loanable funds, shifting the demand curve for loanable funds to the right, from DLF1 to DLF2. This would increase the equilibrium interest rate from i1 to i2 and reduce the quantity of loanable funds from Q1 to Q2. As a result, there would be an excess supply of money in the money market, shifting the supply curve for money to the right from MS1 to MS2. This would cause the equilibrium in the money market to move from point B to point C, where the money market is in equilibrium with the new, higher interest rate and lower quantity of money.

Refer to the Following Figure When Answering