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

Question

Quizplus · Accepted Answer

When the interest rate is greater than the equilibrium interest rate, there is an excess quantity of money because at higher interest rates, people prefer to hold less money and invest more, leading to an excess supply of money. This excess supply puts downward pressure on the interest rate, causing it to fall towards equilibrium. The quantity of money does not automatically increase; it is determined by the central bank or monetary authority.

Suppose That the Interest Rate Is Greater Than the Equilibrium