I did not understand why money supply is constant in the following question. If interest rate rises, more people will save money and supply money in the form of bonds . I guess he is referring to supply of money as from Fed. It is really difficult to answer this kind of questions. ----------------------- Which of the following statements about the demand for and supply of money is least accurate? A) As gross domestic product rises, the demand for money balances also rises. B) As the interest rate rises, the supply of money also rises. C) As the interest rate rises, the demand for money falls. D) As inflation rises, the demand for money by households and businesses also rises. Your answer: D was incorrect. The correct answer was B) As the interest rate rises, the supply of money also rises. The supply of money is determined by the monetary authorities and is not affected by changes in interest rates. Thus, the supply of money curve is vertical.
They base the ans on the fact that the fed has the tools to keep that supply under control with open market, rates and required reserve - supply inelastic
if you review the graph for money market, you can see the supply of money is vertical, this is speaking in the short term, like today…in short term, the supply of money is fixed because it takes time for fed actions to filter through the system
The problem i have with this question is that I think interest rates affect the Qty Demanded and the Qty Supplied for money and not the demand and supply for money. Supply for money is controlled by the Fed. Demand for money is affected by factores other than interest rate changes like GDP growth rate, inflation etc. so i think both b and c would be wrong here.
I second sv102307’s concern too. Isn’t the Increase/Decrease in interest rates results in movement along the exchange rate curve rather than shifting it?