Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Suppose the money-demand curve is currently MD₂. If the current interest rate is r₂, then A) in response, the money-demand curve will shift downward from its current position to establish equilibrium in the money market. B) people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. C) bond issuers and banks will respond by lowering the interest rates they offer. D) there is a surplus of money.

Question

Quizplus · Accepted Answer

If the interest rate is currently at the level represented by r₂, the quantity of money supplied (MS) exceeds the quantity of money demanded (MD). As a result, people will respond to the excess supply of money by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts, which will shift the money-demand curve downward to establish equilibrium in the money market. Bond issuers and banks may respond by lowering interest rates, but this is a result of the shift in the money-demand curve, not the cause of it. There is not enough information to determine whether there is a surplus of money or not.