Question

Why is the demand for money curve downward sloping?

Answer 1

The demand for money curve is downward sloping due to the wealth effect, interest rate effect, and foreign price effect.

Step-by-step explanation:

The demand for money curve is downward sloping due to several factors:

1. Wealth effect: A higher price level reduces the real wealth of individuals, leading to a decrease in consumption. As a result, people hold less money.
2. Interest rate effect: A higher price level increases the demand for money, which in turn drives up interest rates. Higher interest rates reduce investment spending and decrease the quantity of money demanded.
3. Foreign price effect: When the price level rises, domestic goods become relatively more expensive. This discourages exports and increases imports, leading to a decrease in the demand for money.

These factors collectively shape the downward slope of the demand for money curve.