Assume the Money Market Is Initially in Equilibrium

question 36

Multiple Choice

Assume the money market is initially in equilibrium. If the price level increases, according to liquidity-preference theory, what is in excess and for how long?

• A) The supply of money is in excess until the interest rate increases.
• B) The supply of money is in excess until the interest rate decreases.
• C) The demand for money is in excess until the interest rate increases.
• D) The demand for money is in excess until the interest rate decreases.

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Definitions:

Accommodation Party

A person who signs a negotiable instrument on behalf of another, typically to lend their credit without direct benefit.

Negotiable Instrument

A financial document that guarantees payment of a specified amount of money, either on-demand or at a set time, and is transferable from one person to another.

Holder In Due Course

A legal term describing a party who has acquired a negotiable instrument in good faith and for value, and thus has certain protections against defects.

Negotiates

The act of discussing something formally to reach an agreement or compromise on terms.