Chapter 5R, Problem 22MCQ

To determine

The correct option that defines the equilibrium state where the bank could pay interest on checking accounts.

Answer to Problem 22MCQ

Option a is correct.

Explanation of Solution

Explanation for the correct option:

a.

If there is a change in banking regulations that allow banks to pay interest on checking accounts, then customers will save more and spend less in order to earn the maximum interest rate. This will decrease the quantity of money and increase the interest rate. Therefore, option a is incorrect.

Explanation for incorrect options:

b.

The decreasing interest rate will increase the quantity demanded as customers will be less motivated to save more. Therefore, option b is incorrect.

c.

There is an inverse relationship between interest rate and the quantity of money demanded. Therefore, option c is incorrect.

d.

A decrease in interest rates will increase the demand for money. Therefore, option d is incorrect.

e.

As per the money supply curve, there will be no change in quantity if the interest rate is increased or decreased but in the case of money demand, the change in interest rate will change the quantity of money. Therefore, option e is incorrect.

Economics Concept Introduction

Money supply curve: The money supply curve refers to the curve that depicts the relationship between money supplied and the interest rate that prevails in the market.