CA Foundation · Business Economics · Money Market
In a money market initially in equilibrium, the central bank keeps the money supply unchanged but the public's demand for money rises at every interest rate because of higher transaction volumes. What is the likely result?
The equilibrium interest rate rises. Higher money demand shifts the demand curve to the right, and since the central bank holds the supply fixed, people compete for the same stock of money, which pushes the interest rate up until demand again equals supply.
- AThe equilibrium interest rate falls
- BThe equilibrium interest rate risesCorrect
- CThe equilibrium interest rate stays the same and money supply rises
- DThe money supply curve shifts to the right
Explanation
A rise in money demand shifts the demand curve right. With a fixed vertical supply, the new intersection lies at a higher interest rate. A fall in rate would need excess supply of money, which is not present here.
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