Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It decreases interest rates by shifting the money demand curve leftward.
B
It increases bond prices due to higher money supply.
C
It raises interest rates by increasing demand for money.
D
It has no effect on the money market equilibrium.
Understanding the Answer
Let's break down why this is correct
Answer
When consumers have less money, they tend to spend less on goods and services. This decrease in spending can lead to a lower demand for money in the money market because people are not looking to hold as much cash if they are not buying things. As a result, the overall demand curve for money shifts to the left, which means that at each interest rate, people want to hold less money. For example, if a family decides to save more and cut back on their spending, they will need less cash on hand, affecting how much money is circulating in the economy. This shift can lead to lower interest rates, as banks have more money available to lend, influencing how businesses and consumers borrow and invest.
Detailed Explanation
When people have less money, they want to hold onto it more. Other options are incorrect because Some might think that less money means more money supply, but that's not true; It's a common mistake to think that less money means people want more money.
Key Concepts
Money Market Dynamics
Interest Rates
AD-AS Model
Topic
Money Market Dynamics
Difficulty
medium level question
Cognitive Level
understand
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