Why is the demand for real money balances downward? sloping pick the correct ans

Question

Why is the demand for real money balances downward? sloping pick the correct answer:

A. The higher the? short-term nominal interest? rate, the larger the quantity of real balances households and firms want to hold.

B. As the? short-term real interest rate? increases, the opportunity cost of holding money? increases, and households and firms hold more real money balances.???

C. As the? short-term nominal interest rate? increases, the opportunity cost of holding money? decreases, and households and firms hold less real money balances.

D. The higher the interest rate on? short-term assets, the more households and firms give up when they hold large money balances.

Explanation / Answer

The downward slope of demand for real money balance line shows the inverse relationship between interest rate and real money demand. It is because, when the interest rate rises, the opportunity cost of holding money rises as holding the amount of money instead of keeping it in the bank makes the individual forego the amount of interset he would have earned. So the demand for holding money is less when the interest rate is high. Thus, in short, when interest rates are high, the demand for real money balance is low and vice versa.

D. The higher the interest rate on? short-term assets, the more households and firms give up when they hold large money balances.

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.