Use the hypothetical money demand curve below to answer the questions What is th

Question

Use the hypothetical money demand curve below to answer the questions What is the quantity of money demanded when 10 the interest rate is 6%? What is it at 8%? 6% 8% Number Number SL billion billion Choose the answer that best explains the relationship between the quantity of money demanded and the interest rate on bonds. If interest rates increase the quantity of money demanded decreases. Money Demand If interest rates increase money demand Increases. 10 20 30 40 50 60 70 80 90 100 If interest rates increase money demand Money (in billions) falls. If interest rates increase the quantity of money demanded increases.

Explanation / Answer

Corresponding to an interest rate of 6%, the money demand is 40 billion dollars. Also an interest rate of 8% the money demand is 20 billion dollars. This shows there is inverse relation between interest rate and the money demand. That is if interest rates fall, the money demand rises and with an increase in interest rates the money demand falls.

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