Question

For constant output, if the real money supply exceeds the real quantity of money demanded at some initial real interest rate,

A. The real interest rate will rise until the money supply equals the money demanded.
B. The real interest rate will fall until the money supply equals the money demanded.
C. There will be an increase in inflation.
D. The quantity of money demanded will increase.
E. The quantity of money demanded will decrease.

Answer 1

If the real money supply exceeds the demanded amount, the real interest rate will fall, according to the laws of supply and demand, until an equilibrium is reached.

Step-by-step explanation:

When the real money supply exceeds the real quantity of money demanded at an initial real interest rate, basic economic principles suggest that the real interest rate will adjust to bring the money supply and money demand back into equilibrium. Specifically, if there is more real money supply than what is demanded, the real interest rate will tend to fall. This decrease in the real interest rate will continue until the quantity of real money supply equals the real quantity of money demanded, according to the laws of supply and demand.

Therefore, the correct answer to the student's question is: B. The real interest rate will fall until the money supply equals the money demanded.