Figure 34-4. On the figure, MS represents money supply and MD represents money demand.
-Refer to Figure 34-4. Suppose the money-demand curve is currently MD1. If the current interest rate is r2, then
A) the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied.
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) in response, the money-demand curve will shift rightward from its current position to establish equilibrium in the money market.

Question

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. Suppose the money-demand curve is currently MD1. If the current interest rate is r2, then
A) the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. 
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) in response, the money-demand curve will shift rightward from its current position to establish equilibrium in the money market.

Quizplus · Accepted Answer

According to the figure, at interest rate r2, the quantity of money supplied (MS) exceeds the quantity of money demanded (MD1). This means that people have more money than they want to hold at that interest rate. To rectify this situation, people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts, which will decrease the quantity of money supplied and increase the quantity of money demanded until the market reaches equilibrium. This is represented by a leftward shift of the money-supply curve or a rightward shift of the money-demand curve. Thus, the correct option is B.