$$\begin{array} { | c | c | c | c | }
\hline \text { Interest Rate } & \begin{array} { c }
\text { Transactions Demand for } \
\text { Money }
\end{array} & \text { Asset Demand for Money } & \text { Money Supply } \
\hline 2 \% & \$ 220 & \$ 300 & 4460 \
\hline 4 & 220 & 280 & 460 \
\hline 6 & 220 & 260 & 460 \
\hline 8 & 220 & 240 & 460 \
\hline 10 & 220 & 220 & 460 \
\hline
\end{array}$$ Based on the given table, an increase in the money supply of $20 billion will cause the equilibrium interest rate to
A) fall by 4 percentage points.
B) fall by 2 percentage points.
C) rise by 4 percentage points.
D) rise by 2 percentage points.

Question

$$\begin{array} { | c | c | c | c | } 
\hline \text { Interest Rate } & \begin{array} { c } 
\text { Transactions Demand for } \
\text { Money }
\end{array} & \text { Asset Demand for Money } & \text { Money Supply } \
\hline 2 \% & \$ 220 & \$ 300 & 4460 \
\hline 4 & 220 & 280 & 460 \
\hline 6 & 220 & 260 & 460 \
\hline 8 & 220 & 240 & 460 \
\hline 10 & 220 & 220 & 460 \
\hline
\end{array}$$ Based on the given table, an increase in the money supply of $20 billion will cause the equilibrium interest rate to
A) fall by 4 percentage points.
B) fall by 2 percentage points.
C) rise by 4 percentage points.
D) rise by 2 percentage points.

Quizplus · Accepted Answer

According to the quantity theory of money, an increase in the money supply will lead to an increase in the transactions demand for money, which will shift the demand curve to the right. As a result, we can see that at the initial interest rate of 2%, there is an excess supply of money. This excess supply of money will put downward pressure on the interest rate, which will continue to fall until the excess supply is eliminated. Therefore, the equilibrium interest rate will fall by 2 percentage points.

Based on the Given Table, an Increase in the Money