Answer to Question #277503 in Microeconomics for Noxolo Tshuma

Question

Explain, with the aid of a graph, the effect of an interest rate decrease on the (7) money market equilibrium.

Answer 1

If the interest rate decreases from r* to r**, people will want to hold more money and the quantity of money demand will increase. As a result, the money supply will have to be increased from Ms* to Ms** to attain a new equilibrium in the money market.