Suppose that the interest rate is greater than the equilibrium interest rate. Which of the following oc
I. There is an excess quantity of money.
II. The quantity of money automatically increases.
III. The interest rate falls.
A) I only
B) I, II and III
C) I and II
D) I and III

Question

Quizplus · Accepted Answer

If the interest rate is greater than the equilibrium interest rate, it means that lenders are not willing to lend money at the prevailing rate, and borrowers are demanding more money than is available at that rate. This creates an excess quantity of money, as borrowers cannot obtain as much funding as they need. As a result, the interest rate falls, as lenders are forced to lower their rates to attract borrowers. The quantity of money does not automatically increase, as there is no increase in demand for loans.

Suppose That the Interest Rate Is Greater Than the Equilibrium