The figure given below shows equilibrium in a money market. Which of the following will be observed if the money supply curve shifts from S to S' while the rate of interest remains at "r"?

A) There will be an excess demand for money.
B) There will be an excess supply of money.
C) The Fed will buy U.S. Treasury securities.
D) The quantity of money demanded will fall.
E) The quantity of money supplied will fall.

Question

The figure given below shows equilibrium in a money market. Which of the following will be observed if the money supply curve shifts from S to S' while the rate of interest remains at "r"?

A) There will be an excess demand for money. 
B) There will be an excess supply of money. 
C) The Fed will buy U.S. Treasury securities. 
D) The quantity of money demanded will fall. 
E) The quantity of money supplied will fall.

Quizplus · Accepted Answer

If the money supply curve shifts from S to S', it means there has been an increase in the money supply. In the given diagram, the equilibrium is at point A where the interest rate is "r" and the quantity of money demanded and supplied is "Q". If the money supply curve shifts rightward from S to S', the new equilibrium point will be at B. At point B, the interest rate is still "r" but the quantity of money demanded and supplied is now "Q1". As the quantity of money supplied has increased, there will be an excess supply of money (i.e. more money is supplied than demanded) leading to a decrease in the interest rate. Therefore, the correct answer is B.

The Figure Given Below Shows Equilibrium in a Money Market