Question

When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value of money _________.a. decreases, so the quantity of money demanded increases. b. increases, so the quantity of money demanded increases.

Answer 1

a. decreases, so the quantity of money demanded increases

Step-by-step explanation:

When the value of money decreases there will naturally be high demand for money because the opportunity cost of holding cash is very low.

The opportunity cost of holding money is the interest that is forgone, when price level increases, the value of money falls and the demand for money increases.

When the value of money increases as a result of high interest rate, it reduces our liquidity preference and the demand for money will decrease.