Chapter 28, Problem 7MCQ

To determine

Money demand curve

Explanation of Solution

During periods of inflation, there is a large increase in the demand for money because consumers often need more cash to keep up with growing commodity costs. Keep in mind that you need less money when interest rates are high and more money when they are low. Because until you receive a high rate of return, there is little incentive to maintain money in a savings account.

The link between money demand and interest rates in the economy is depicted by the money demand curve, which shows that as interest rates drop, money demand rises.

Additionally, the amount requested will drop as interest rates climb.

The real GDP movement, changes in the aggregate price level, technical advancements, and institutional changes are the main factors that affect the money demand curve.

Therefore, the money demand curve shows a positive relationship between the interest rate and the quantity of money held as cash.

Hence, the correct option is E.