Which of the following describes the process that returns the money market to equilibrium when the quantity of money demanded is greater than the money supply?

Choose 1 answer:
(A) People buy bonds, which lowers bond prices, which in turn increases interest rates.
(B) People buy bonds, which increases bond prices, which in turn lowers interest rates.
(C) People sell their bonds, which lowers bond prices, which in turn increases interest rates.
(D) People sell their bonds, which raises bond prices, which in turn decreases interest rates.
(E) People sell their bonds, which lowers bond prices, which in turn decreases interest rates.

Question

Which of the following describes the process that returns the money market to equilibrium when the quantity of money demanded is greater than the money supply?

Choose 1 answer:
(A) People buy bonds, which lowers bond prices, which in turn increases interest rates.
(B) People buy bonds, which increases bond prices, which in turn lowers interest rates.
(C) People sell their bonds, which lowers bond prices, which in turn increases interest rates.
(D) People sell their bonds, which raises bond prices, which in turn decreases interest rates.
(E) People sell their bonds, which lowers bond prices, which in turn decreases interest rates.

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ When the quantity of money demanded is greater than the money supply, people will sell their bonds to obtain money. ‖ ‖ step 2 ⋮ Selling bonds increases the supply of bonds in the market, which lowers bond prices. ‖ ‖ step 3 ⋮ Lower bond prices lead to higher interest rates because the yield on bonds increases as their prices decrease. ‖ ‖ step 4 ⋮ Higher interest rates reduce the quantity of money demanded, moving the money market back to equilibrium. ‖ ***C*** ∻Key Concept∻ ⚹Relationship between bond prices and interest rates⚹ ∻Explanation∻ ⚹When bond prices decrease, interest rates increase, which helps to restore equilibrium in the money market.⚹◊What is the relationship between the quantity of money demanded, money supply, and interest rates in the money market equilibrium process?⍭ Generate me a similar question◊

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