Question

An increase in the interest rate

A. increases the demand for money.
B. increases the quantity of money demanded.
C. decreases the quantity of money demanded.
D. decreases the demand for money.

Answer 1

D. decreases the demand for money.

Explanation:

Money demand and interest rate has an inverse relationship.

An increase in the interest rate decreases the demand for money. An increase in the price of bonds results in a lower interest rate.

When the interest rate increases, an individual's opportunity cost for holding his money increases. In this condition, the person chooses to hold more bonds, thereby demanding less money.