Which of the following statements is/are correct with respect to the demand for money?
i. When the interest rate is high, the demand for money is low.
ii. When the interest rate is low, demand for money is also low.
iii. When the interest rate is high, demand for money is also high.
iv. When the interest rate is low, demand for money is high.
Show answer & explanation
Correct answer: B
Explanation
The correct answer is option 2 i.e. Only i and iv.
The correct statements regarding the demand for money are i. When the interest rate is high, the demand for money is low, and iv. When the interest rate is low, demand for money is high.
- Inverse Relationship: The demand for money and interest rates have an inverse relationship.
- High Interest Rates, Low Demand: When interest rates are high, the opportunity cost of holding money (which earns no interest) increases, and people are more likely to hold assets that offer higher returns, like bonds. This leads to a lower demand for money.
- Low Interest Rates, High Demand: Conversely, when interest rates are low, the opportunity cost of holding money is lower, and people are more likely to hold money as a store of value, increasing the demand for money.
- Statement ii is incorrect: When interest rates are low, the demand for money is high, not low.
- Statement iii is incorrect: When interest rates are high, the demand for money is low, not high.