Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
By increasing the interest rates, leading to a decrease in money demand
B
By decreasing the supply of money, causing an increase in money demand
C
By implementing quantitative easing, which raises the interest rates
D
By adjusting reserve requirements, which directly influences the money supply
Understanding the Answer
Let's break down why this is correct
Answer
Central bank policies, like changing interest rates or controlling the money supply, play a big role in the money market's equilibrium. When a central bank lowers interest rates, it makes borrowing cheaper, which encourages people and businesses to take loans and spend more money. This increase in spending raises the demand for money because people need more cash for their transactions. For example, if a central bank cuts interest rates, a small business might decide to take a loan to buy new equipment, increasing its demand for money. On the other hand, if the central bank raises interest rates, borrowing becomes more expensive, leading to less demand for money and shifting the equilibrium in the opposite direction.
Detailed Explanation
When a central bank changes reserve requirements, it affects how much money banks can lend. Other options are incorrect because Some might think that higher interest rates always mean less money demand; It's a common mistake to think that reducing money supply increases demand.
Key Concepts
central bank policies
equilibrium in the money market
Topic
Money Demand and Supply Effects
Difficulty
medium level question
Cognitive Level
understand
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