Answer to Question #303924 in Macroeconomics for Ofy

Question

The quantity of money demanded for precautionary purposes decreases if

a.

consumer incomes increase.

b.

total output decreases.

c.

the inflation rate increases.

d.

the interest rate increases.

Answer 1

The correct answer.

d) The interest rate increases

The higher the interest rate, the lower the quantities of money demanded for precautionary motives. When interest rates rises a bond of funds strategy becomes more attractive hence low quantity of money demanded.