Figure 34-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 34-4.Suppose the money-demand curve is currently MD₁.If the current interest rate is r₂,then A)the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. B)people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. C)bond issuers and banks will respond by lowering the interest rates they offer. D)in response,the money-demand curve will shift rightward from its current position to establish equilibrium in the money market.

Question

Quizplus · Accepted Answer

If the current interest rate is below the equilibrium level (r₂), there will be excess supply of money, which means the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. People will respond by either selling interest-bearing bonds, which reduces the bond prices and increases interest rates, or by withdrawing money from interest-bearing bank accounts, which reduces the supply of money and raises interest rates. This process will continue until the equilibrium interest rate is reached (rE in the figure). Therefore, the best choice is (B) people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts.