Question

When the interest rate is above the equilibrium level, 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 respond by buying interest-bearing bonds or by depositing money in interest-bearing bank accounts. c. bond issuers and banks respond by lowering the interest rates they offer. d. All of the above are correct.

Answer 1

Answer:

D

Explanation:

When interest rate is above the equilibrium level, people would be less willing to hold cash. Instead they would prefer to save or invest in  interest-bearing bonds. This is because as a result of the higher interest rate, interest paid on their deposit and investment would be higher.

As a result of the increase in savings, there would be an increase in the supply of loanable funds over demand for loanable funds. This would lead to a reduction in interest rate until equilibrium interest rate is reached.