Question

If the demand for money is $100 billion and the supply of money is $200 billion, then the interest rate will: fall. rise. remain unchanged. be in equilibrium.

Answer 1

fall

Step-by-step explanation:

The situation above can be best explained by using the "Liquidity Preference Theory." According to the theory when money supply increases (as in the situation above), the interest rate falls. So, this means that many people will be more willing to invest, thereby resulting to a higher income. On the contrary, if the money supply decreases, the interest rate rises. This may temporarily increase the employment condition, however, it can lead to inflation in the long-run.

So, this explains the answer.