Question by SwimGirl: What is the relationship between interest rates and demand for money?
A) As interest rates decrease, demand for money increases.
B) As interest rates increase, demand for money increases.
C) Interest rates are determined by demand for money.
D) Interest rates and demand for money are unrelated.
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I am so confused. Is money supply the same thing as demand? In that case it would be B. But then again what if has nothing to do with it, then it would be D?
Best answer:
Answer by SDD
C Interest rates reflect the relative demand and supply of money that lenders will loan. It’s just like anything else that’s traded. When demand for something increases the price of that item will increase. The price of borrowing money is interest. A and B imply that demand is a function of some arbitrary price, rather than the other way around.
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A
Definitely A.
When interest rates decrease, bonds become less attractive. If you are getting a lower interest rate on your investments, you are more likely to trade those investments in for hard cash.
Since bonds and money are substitutes, when bonds become less attractive, money becomes more attractive. So the demand for money increases.