Question

When the money market is depicted in a diagram with the value of money on the vertical axis, which of the following happens if the price level is above the equilibrium level?

a. There is a shortage, so the price level will fall.

b. There is a shortage, so the price level will rise.

c. There is a surplus, so the price level will rise.

d. There is a surplus, so the price level will fall.

Answer 1

If the price level is above the equilibrium level, it means that the value of money is below the equilibrium level. therefore we must be having a shortage of money in the money market where there is excess demand. this will put upward pressure on the value of money and downward pressure on price level for that price level will fall

Option A is correct