What type of relationship exists between the interest rate and the quantity of money demanded?
A) a direct relationship
B) an inverse relationship
C) a direct relationship when the interest rate is low, and an inverse relationship when the interest rate is high
D) an inverse relationship when the interest rate is low, and a direct relationship when the interest rate is high

Question

What type of relationship exists between the interest rate and the quantity of money demanded?  
A) a direct relationship 
B) an inverse relationship 
C) a direct relationship when the interest rate is low, and an inverse relationship when the interest rate is high 
D) an inverse relationship when the interest rate is low, and a direct relationship when the interest rate is high

Quizplus · Accepted Answer

There exists an inverse relationship between the interest rate and the quantity of money demanded. When the interest rate is high, people tend to save more, and demand for money decreases, thereby decreasing the quantity of money demanded. Conversely, when the interest rate is low, people tend to borrow more, and demand for money increases, thereby increasing the quantity of money demanded. So, as the interest rate increases, the quantity of money demanded decreases, and vice versa.

What Type of Relationship Exists Between the Interest Rate and the Quantity