On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by
A) a line parallel to the horizontal axis.
B) a vertical line.
C) a downsloping line or curve from left to right.
D) an upsloping line or curve from left to right.

Question

Quizplus · Accepted Answer

The asset demand for money will be represented by a downsloping line or curve from left to right. This is because as the interest rate decreases, individuals and firms will demand more money to hold as an asset, therefore increasing the quantity of money demanded. Conversely, as the interest rate increases, the opportunity cost of holding money increases, and individuals and firms will demand less money as an asset, thereby decreasing the quantity of money demanded. This relationship is reflected in a downsloping line or curve.

On a Diagram Where the Interest Rate and the Quantity