Trusts than national banks A had lower reserve requirements

Trusts than national banks. A. had lower reserve requirements : were more closely regulated had higher reserve requirements kept more capital Figure: Equilibrium in the Money Market (Figure: Equilibrium in the Money Market) Look at the figure Equilibrium in the Money Market. If the rate of interest is below equilibrium, there will be an excess money and the interest rate will

Solution

Q2. Equilibrium in money market is attained at point where demand for money curve intersects the supply of money curve.

The interest rate corresponding to such point of intersection is referred to as equilibrium interest rate.

The given figure shows that equilibrium interest rate is r₁ as demand for money curve and supply of money curve are intersecting at point corresponding to this interest rate.

At r₁, rate of interest, Q₁ quantity of money is demanded and supplied.

Now, if the rate of interest falls that is market rate of interest become r₀ (this interest rate is below the equilibrium interest rate, r₁)

At, r₀, rate of interest, quantity demanded of money is Q₂ while quantity supplied of money is Q₁. As quantity demanded of money is greater than quantity supplied of money, there is excess demand for money at r₀ interest rate.

As demand for money exceeds supply of money, interest rate will rise.

So, if the rate of interest is below equilibrium, there will be an excess demand for money and interest rate will rise.

Thus, the correct answer is option (A).