An increase in the interest rateA) increases the demand for money.B) increases the quantity of money demanded.C) decreases the demand for money.D) decreases the quantity of money demanded.
Question
An increase in the interest rateA) increases the demand for money.B) increases the quantity of money demanded.C) decreases the demand for money.D) decreases the quantity of money demanded.
Solution
The correct answer is C) decreases the demand for money.
Here's the step by step explanation:
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Interest rate is the cost of borrowing money or the return for lending money.
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When interest rates increase, it becomes more expensive to borrow money. This means people and businesses are less likely to take out loans, thus decreasing the demand for money.
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On the other hand, higher interest rates make saving or investing money more attractive because the return is higher. This also leads to a decrease in the demand for money, as people prefer to save or invest their money rather than spend it.
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Therefore, an increase in the interest rate decreases the demand for money.
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