The demand for money and the interest rate are

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Prepare for the Rutgers Macroeconomics Test with multiple choice questions, hints, and explanations. Master key concepts and excel in your exam!

Multiple Choice

The demand for money and the interest rate are

Explanation:
Money demand is negatively related to the interest rate. The reason is that money pays no interest, while other assets (like bonds) do. When the interest rate rises, the opportunity cost of holding money increases, so people substitute toward interest-bearing assets and hold less money. When rates fall, the cost of holding money is lower, so the quantity of money demanded rises. This holds when income and prices are constant; if those conditions change, the demand curve shifts, but its slope remains downward.

Money demand is negatively related to the interest rate. The reason is that money pays no interest, while other assets (like bonds) do. When the interest rate rises, the opportunity cost of holding money increases, so people substitute toward interest-bearing assets and hold less money. When rates fall, the cost of holding money is lower, so the quantity of money demanded rises. This holds when income and prices are constant; if those conditions change, the demand curve shifts, but its slope remains downward.

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