Money supply and interest rates

When money demand increases but money supply remains constant, there is excess demand for money. People attempt to acquire more money by reducing spending and increasing savings, or selling financial assets. This drives up interest rates as lenders can charge more for scarce money. Option (a) is incorrect—prices would not necessarily fall. Option (c) contradicts the logic. Option (d) assumes income increases, which is not guaranteed when money supply is fixed. The relationship follows basic supply-demand theory: higher demand with fixed supply leads to higher price (interest rate in this context). > Core principle: Excess money demand with fixed supply → Interest rates rise to equilibrate demand and supply.