As the interest rate falls, a. the quantity of money demanded falls, which would reduce a shortage. b. the quantity of money demanded falls, which would reduce a surplus. c. the quantity of money demanded rises, which would reduce a shortage. d. the quantity of money demanded rises, which would reduce a surplus.

Question

Brennen Blanchard

Business

4 September, 08:43

As the interest rate falls, a. the quantity of money demanded falls, which would reduce a shortage. b. the quantity of money demanded falls, which would reduce a surplus. c. the quantity of money demanded rises, which would reduce a shortage. d. the quantity of money demanded rises, which would reduce a surplus.

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Answers (1)

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Finley Nolan · Answer 1

The correct answer is d. the quantity of money demanded rises, which would reduce a surplus.

Explanation:

As the interest rate falls, the cost of borrowing money becomes cheaper. This induces people to borrow more money. Therefore if there is a surplus in the market, this higher demand would reduce it.

But at the same time a lower interest rate induces people to lend less money, since the returns obtained from interests decrease. Even though the multiple choices don't mention the supply, this too contributes to reducing any surplus that there's been in the market and i think it's worth mentioning.

To conclude we can say that the correct answer is D, because the quantity of money demanded rises, which would provoke a reduction in the surplus of money.