Answer to Question #131435 in Macroeconomics for Josias

Question

Explain, with the aid of a graph, the impact of a cut in the interest rate on the demand for money. 

Answer 1

The demand for money is inversely related to the interest rate At high-interest rates, people prefer to hold bonds (which give a high-interest payment. When interest rates fall, holding bonds gives a lower return so people prefer to hold cash.