What does the money demand curve describe?
A) how the quantity of money demanded varies with nominal GDP
B) how the quantity of money demanded varies with real GDP
C) how the quantity of money demanded varies with the price level
D) how the quantity of money demanded varies with the interest rate

Question

What does the money demand curve describe?  
A) how the quantity of money demanded varies with nominal GDP 
B) how the quantity of money demanded varies with real GDP 
C) how the quantity of money demanded varies with the price level 
D) how the quantity of money demanded varies with the interest rate

Quizplus · Accepted Answer

The money demand curve describes how the quantity of money demanded varies with the interest rate. As the interest rate rises, people and firms demand less money because it becomes more expensive to borrow and hold cash, which does not earn interest. Conversely, as the interest rate falls, people and firms demand more money because it becomes cheaper to borrow and hold cash. The shape of the money demand curve reflects the inverse relationship between the interest rate and the quantity of money demanded.

What Does the Money Demand Curve Describe