Question

If the interest rate is above the equilibrium value, the: a) demand for real balances exceeds the supply. b) supply of real balances exceeds the demand. c) market for real balances clears. d) demand for real balances increases.

Answer 1

Answer:

Option (b) is correct.

Explanation:

When we are considering the theory of liquidity preference, the higher interest rate will lead to reduce the demand for real balances and will lead to increase the supply of real balances. As it will be profitable for the money holders to invest money in bonds because the opportunity cost holding money (i.e. interest rate) is higher. So there will be more supply of real balances as compared to the demand for real balances.