If, in the Market for Money, the Quantity of Money

question 319

Multiple Choice

If, in the market for money, the quantity of money demanded exceeds the money supply, the interest rate will

• A) fall, causing households and businesses to hold less money.
• B) rise, causing households and businesses to hold less money.
• C) rise, causing households and businesses to hold more money.
• D) fall, causing households and businesses to hold more money.

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Definitions:

Heuristics

The brain’s low-energy mental shortcuts for making decisions. They are “fast and frugal” and work well in most situations but in other situations result in systematic errors.

System 1

This refers to a concept in psychology, specifically in the dual-process theory of thought, where System 1 is the fast, instinctive, and emotional way of thinking.

Availability Heuristic

A cognitive bias where individuals rely on immediate examples that come to mind when evaluating a specific topic, concept, method, or decision.

Cognitive Biases

Misperceptions or misunderstandings that cause systematic errors. Most result either (1) from heuristics that are prone to systematic errors or (2) because the brain is attempting to solve a type of problem (such as a calculus problem) for which it was not evolutionarily evolved and for which it has little innate capability.