Question

# 1. If there is an excess supply of money a) the real money supply shifts left...

1. If there is an excess supply of money

a) the real money supply shifts left to make an equilibrium

b)the interest rate falls

c)the interest rate stays constant, but consumer confidence falters.

d)the interest rate rises

e)the real money supply shifts right to make an equilibrium

Answer : Option b) the interest rate falls

An increase in money supply means more availability of funds for borrowing. Thereby increasing supply of funds but the demand stays intact, thus this makes the interest rates to fall. Basically an increase in money supply would lead to a rightward shift of the money supply curve, now this new curve intersects with the demand curve at a lower point of interest rate. In simple terms, increase in money supply leads to a fall in interest rate (due to excess supply problem).

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