Which of the following, ceteris paribus, will most likely cause a decrease in the quantity of money demanded?

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BlackTom AI · Accepted Answer

The question asks, ceteris paribus, which factor will most likely reduce the quantity of money demanded. The given correct option states: 'an increase in the interest rate.'

To understand why, recall that money demand consists of a transaction motive (money needed for everyday purchases) and an asset motive (holding money as cash versus other financial assets). When the interest rate rises, the opportunity cost of holding money (which earns no interest) increases because you forego higher interest income from alternative assets like bonds or savings accounts. As a result, households and firms tend to reduce their money holdings and move toward interest-bearing assets, leading to a lower quantity of money demanded at any given price level and income.

This relationship aligns with foundational money-demand theory: money demand is negatively related to the interest rate. In other words, higher rates discourage holding onto liquid cash and encourage shifting funds into interest-earning instruments, thereby decreasing the quantity of money demanded.

Why the other possibilities (if presented) would typically be less consistent: if the interest rate falls, the opportunity cost of holding money falls, making people more willing to hold cash, increasing money demanded. Changes in other factors—such as a dramatic rise in price level, a shift in payment technologies, or a change in real income—could also affect money demand, but the primary ceteris paribus driver among standard macro questions is the interest rate; an increase in the rate is the classic mechanism reducing money demanded.

Note: the provided data shows the only listed option is 'an increase in the interest rate,' which conceptually matches the standard result that higher interest rates reduce the quantity of money demanded when all else is held constant.

ECON 2020-001 Spring 2025 Module 5 Quiz

Which of the following, ceteris paribus, will most likely cause a decrease in the quantity of money demanded?

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ECON 2020-001 Spring 2025 Module 5 Quiz

Which of the following, ceteris paribus, will most likely cause a decrease in the quantity of money demanded?

View Explanation

Log in for full answers

Similar Questions

If the nominal interest rate increases, you would expect:

If the money supply is held constant, then an increase in the nominal interest rate will ______ the demand for money and ______ the price level

If the money supply is held constant, then an increase in the nominal interest rate will ______ the demand for money and ______ the price level

Which of the following are important to determine money demand for individuals?

Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________.

Keynes's liquidity preference theory indicates that the demand for money is ________ related to ________.

Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________.

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

If the money supply is held constant, then an increase in the nominal interest rate will the demand for money and the price level

If the money supply is held constant, then an increase in the nominal interest rate will the demand for money and the price level

Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's , which he believed were proportional to .

Keynes's liquidity preference theory indicates that the demand for money is related to .

Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's , which he believed were proportional to .