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15 May, 15:10

Suppose that households became mistrustful of the banking system and decide to decrease their checking account balances and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should A) increase. B) decrease C) not change. D) increase, then decrease.

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  1. 15 May, 18:09
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    Answer: The equilibrium interest rate should A. increase.

    Explanation: The demand curve for money shows the quantity of money that is demanded at a given interest rate. The money supply model shows the money supply that is set at a given interest rate. If there is an increase in interest rates the equilibrium rate will increase to adjust for the rising rates.
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