If the Interest Rate Is Above the Equilibrium Rate, How

question 51

Multiple Choice

If the interest rate is above the equilibrium rate, how is equilibrium achieved in the money market?

• A)People buy goods to get rid of their excess money, lowering the price of goods and lowering the interest rate.
• B)People sell goods to get rid of their excess money, lowering the price of goods and lowering the interest rate.
• C)People sell bonds to get rid of their excess money, lowering the price of bonds and lowering the interest rate.
• D)People sell bonds to get rid of their excess money, raising the price of bonds and lowering the interest rate.
• E)People buy bonds to get rid of their excess money, raising the price of bonds and lowering the interest rate.

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Definitions:

Relevant Interest Rate

The appropriate rate used for discounting future cash flows or evaluating investment opportunities, reflecting the cost of capital.

Opportunity Cost

The cost of forfeiting the next best alternative when making a decision or investment.

Next Best Use

An economic concept referring to the most profitable or valuable alternative use of a resource if it is not used in its current manner.

Prime Rate

The interest rate that commercial banks charge their most creditworthy customers, usually large corporations.