The supply-of-money curve is almost perfectly inelastic because:
A)as interest rates rise, people will want to be supplied with more loans.
B)the Fed makes more money available in response to higher interest rates.
C)banks generally find loans more profitable than keeping their assets as cash in their vaults or reserve deposits at the Fed, whether interest rates are 4% or 10%.
D)the Fed lowers the discount rate as interest rates rise.

Question

The supply-of-money curve is almost perfectly inelastic because:
A)​as interest rates rise, people will want to be supplied with more loans.
B)​the Fed makes more money available in response to higher interest rates.
C)​banks generally find loans more profitable than keeping their assets as cash in their vaults or reserve deposits at the Fed, whether interest rates are 4% or 10%.
D)​the Fed lowers the discount rate as interest rates rise.

Quizplus · Accepted Answer

Banks prefer to lend their money out instead of keeping it as cash or reserve deposits at the Fed, regardless of interest rates. This makes the supply of money curve almost perfectly inelastic. None of the other options correctly explain this characteristic of the supply-of-money curve.

The Supply-Of-Money Curve Is Almost Perfectly Inelastic Because