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Other things being equal, the quantity of money that people want to hold can be expected to a. increase as the interest rate increases. b. decrease as the interest rate increases. c. decrease as real GDP increases. d. None of the answers are correct.
Economics For Today
Solutions
Economics For Today
Other things being equal, the quantity of money that people want to hold can be expected to
- a. increase as the interest rate increases.
- b. decrease as the interest rate increases.
- c. decrease as real GDP increases.
- d. None of the answers are correct.
The interest rate and the quantity of money held by people.
Explanation of Solution
The barter system was a market exchange system that existed in the ancient period. According to the barter system, one commodity is exchanged for another commodity in the market. Thus, there should be double co-incidence of needs for the exchange to take place in the market. This problem was corrected with the establishment of money. Money is anything that serves as a medium of exchange in the market, unit of account as well as the store of value in the economy. There are many forms of money such as paper currencies, metallic coins, bills, and so forth. There are mainly three demands for money and they are speculative demand for money, precautionary demand for money, and transaction demand for money.
Option (b):
The rate of interest indicates the amount of interest earned for the deposits that the people make with the depository institutions in the economy. When the rate of interest is higher, it means that the earning from deposits is higher. As a result, people will hold less quantity of money in the economy. Thus, as the rate of interest increases, the quantity of money held by the people will decrease. Thus, option 'b' is the correct answer...
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