A new regulation lowers the interest rates banks can offer on checking account funds. This will shift the money demand curve

• A. Rightward; supply
• B. Rightward; demand
• C. Leftward; demand
• D. Leftward; supply

Answer: (C)

The main idea is that money demand depends on the opportunity cost of holding money, which is the return you could earn on alternative assets. When the regulation lowers the interest rate banks can pay on checking account funds, the return from holding money in checking falls. That makes holding money relatively more attractive for a given level of interest elsewhere, so people want to hold more money for transactions and liquidity. At every interest rate, the quantity of money demanded increases, so the money demand curve shifts to the right.

This change affects the demand side, not the supply side. The money supply is typically set by the central bank and would shift only if policy directly changes the money stock, not just the incentive to hold money.