If the interest rate is above the equilibrium interest rate, then
A) people will sell bonds and the interest rate will fall.
B) the quantity of money demanded exceeds the quantity supplied.
C) people will buy bonds and the interest rate will fall.
D) there is an excess demand for money.

Question

Quizplus · Accepted Answer

If the interest rate is above the equilibrium interest rate, it means that the return on holding money is lower than the return on holding bonds. Therefore, people will try to earn a higher return by buying bonds, leading to an increase in demand for bonds and a decrease in their interest rate. As a result, the interest rate will fall until it reaches the equilibrium level where the quantity demanded of money equals the quantity supplied.

If the Interest Rate Is Above the Equilibrium Interest Rate