Suppose that households became mistrustful of the banking system and decide to decrease their checking account balances and increase their holdings of currency.Using the money demand and money supply model and assuming everything else is held constant,the equilibrium interest rate should
A)increase.
B)decrease.
C)not change.
D)increase,then decrease.

Question

Quizplus · Accepted Answer

If households decide to decrease their checking account balances and increase their holdings of currency, the demand for money will decrease. As a result, the interest rate will increase as the supply of money remains constant. This is because households are now holding more money in the form of currency and less in the form of checking account balances. This decreases the amount of money available for banks to lend out, which in turn increases the interest rate.

Suppose That Households Became Mistrustful of the Banking System and Decide