Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
As interest rates increase, the demand for money decreases.
B
As interest rates increase, the demand for money increases.
C
Interest rates have no effect on the demand for money.
D
As interest rates decrease, the demand for money remains constant.
Understanding the Answer
Let's break down why this is correct
Answer
The liquidity preference theory explains that interest rates and the demand for money are closely linked. When interest rates are high, people prefer to save their money in banks or invest it to earn more interest, which means they hold less cash. Conversely, when interest rates are low, people are more willing to keep cash on hand because they earn less from saving or investing. For example, if the interest rate drops to 1%, someone might choose to keep more cash available for spending rather than putting it in a savings account. Therefore, as interest rates decrease, the demand for money increases, and as they rise, the demand for money decreases.
Detailed Explanation
When interest rates go up, people want to hold less cash. Other options are incorrect because This answer suggests that higher interest rates make people want more cash; This answer says interest rates don't affect money demand.
Key Concepts
Interest Rates
Topic
Money Demand and Interest Rates
Difficulty
easy level question
Cognitive Level
understand
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.