Assume the Fed has complete control over the money supply. If the demand for money were less than the supply of money, we would expect
A)an increase in the quantity of money demanded and a decline in the rate of interest.
B)a decrease in the quantity of money demanded and an increase in the rate of interest.
C)a decrease in the quantity of money supplied, a decrease in the quantity of money demanded, and an increase in the rate of interest.
D)a decrease in the quantity of money demanded and a decrease in the rate of interest.
E)an increase in the quantity of money supplied, a decrease in the quantity of money demanded, and an increase in the rate of interest.

Question

Quizplus · Accepted Answer

When the supply of money exceeds the demand for money, the excess supply tends to lower the interest rate. This decrease in the interest rate makes holding money more attractive (since the opportunity cost of holding money, which is the interest foregone, is lower) and thus increases the quantity of money demanded until equilibrium is reached.

Assume the Fed Has Complete Control Over the Money Supply