Whenever there is excess demand for real balances, short-run adjustment occurs because:
A) savers and investors buy bonds and drive up their prices (drive down nominal rates of interest).
B) investors and borrowers sell bonds (convert to cash) and drive down their prices (drive up nominal rates of interest).
C) the price level falls to restore real balances.
D) aggregate demand is decreased to restore equilibrium.

Question

Quizplus · Accepted Answer

CWhen there is excess demand for real balances, individuals may sell bonds to increase their cash holdings, driving down bond prices and pushing up nominal interest rates (choice B). Alternatively, a decrease in the price level can increase the value of money holdings in real terms, restoring equilibrium without changing the nominal supply of money (choice C).

Whenever There Is Excess Demand for Real Balances, Short-Run Adjustment