3.

Suppose that foreigners start holding more U.S. currency. For a given interest rate, Americans

don't change their holdings of either currency or checking deposits. Assume the Fed keeps the monetary

base constant. Describe what happens to:

I. the money supply

II.money demand

III.the equilibrium interest rate

A.

the money supply is unchanged, money demand increases and the equilibrium interest rate

increases.

B.

the money supply increases, money demand increases and the equilibrium interest rate is

unchanged.

C.

the money supply decreases, money demand increases and the equilibrium interest rate

increases.

D.

the money supply, money demand, and the equilibrium interest rate are all unchanged.

Answer: C

Why is the answer C? I would think it would be A.