Question

When the interest rate is below the equilibrium interest rate, there is an excess ________ money and the interest rate will ________.

A) demand for; fall

B) supply of; fall

C) demand for; rise

D) supply of; rise

Answer 1

The right option is (c).

 

Explanation:

When the interest rate is below the equilibrium interest rate, there is an excess demand for money and the interest rate will rise..

 

All else being equal, a larger money supply or smaller money demanded lowers market interest rates, making it less expensive for consumers to borrow. Conversely, smaller money supplied or larger money demanded tend to raise market interest rates, making it pricier for consumers to take out a loan. In this case, smaller money supplied or  a larger money demanded, hence interest rate rises.

 

Therefore, combining the graph above and the statement above. 

In the question, the interest rate is below equilibrium level and thus money demand is high (excess demand for money) and so when the money demanded is higher (larger) than the money supplied, then interest rate also rises. 

So when the money demanded is higher (larger) than the money supplied, then interest rate also rises.