Which of the Following Explains Why the Demand for Money

question 79

Multiple Choice

Which of the following explains why the demand for money curve has an inverse relationship between the interest rates and the quantity of money demanded?

• A) As the interest rate rises, the opportunity cost of holding money rises, and people respond by converting cash or checking account balances into interest-bearing financial investments.
• B) As the interest rate rises, people find it advantageous to borrow money, which increases the quantity of money demanded.
• C) As the interest rate falls, the opportunity cost of holding money rises, and people respond by converting cash or checking account balances into interest-bearing financial investments.
• D) As the interest rate rises, the demand for money curve shifts outward to the right.

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Definitions:

Annual Rate

The interest rate for a whole year, as opposed to just a monthly fee/rate or other rate expressed for a different period.

Effective Interest Rate

The equivalent annually compounded rate of interest.

Lump Sum

A single payment made at a particular time, as opposed to a series of payments made over time.

Monthly Compounded

Refers to the process of calculating interest on both the initial principal and the accumulated interest from previous periods on a monthly basis.