What is the relationship between interest rate and demand for money?
Show answer & explanation
Correct answer: B
Explanation
The correct answer is option 2 i.e. Inverse.
The relationship between interest rates and the demand for money is generally inverse. When interest rates rise, the opportunity cost of holding money increases, leading people and businesses to prefer saving or investing their funds to earn higher returns. As a result, the demand for money decreases. Conversely, when interest rates fall, holding cash becomes less costly, encouraging individuals and businesses to demand more money for transactions and liquidity. This inverse relationship is fundamental in monetary economics, influencing central banks' policies to manage economic activity, inflation, and overall financial stability.