Question

if the quantity of money demanded exceeds the money supply, what will the interest rate do? multiple choice remain unchanged, but the demand for money would decrease. rise, causing people to hold less money. fall, causing people to hold less money. rise, causing people to hold more money. fall, causing people to hold more money.

Answer 1

When the demand for money exceeds the money supply, the interest rate will rise, causing people to demand less money as they are deterred by the higher cost of borrowing.

Step-by-step explanation:

If the quantity of money demanded exceeds the money supply, the interest rate will rise, causing people to hold less money. This can be understood through the laws of demand and supply that apply to financial markets. The higher rate of return, which is akin to a higher price for holding money, decreases the quantity of money demanded because consumers will reduce the quantity that they borrow. Equilibrium is achieved in financial markets when supply equals demand, and this means that when there is excess demand for money (like in this case where demand exceeds supply), the price of money—which is the interest rate—will go up until the demand decreases to match the supply.