The demand for money is likely downward sloping because
A)interest sensitive consumption and business investment are both negatively impacted by increases in the interest rate.
B)interest sensitive consumption and business investment are both positively impacted by increases in the interest rate.
C)the marginal revenue product of labor is decreasing.
D)the government can always borrow what it wants.

Question

Quizplus · Accepted Answer

When interest rates increase, the opportunity cost of holding money increases as well, since it now becomes more attractive to lend money and earn interest. As a result, people and businesses may choose to hold less money, which leads to a decrease in demand for money. Additionally, higher interest rates can also discourage consumption and investment, which are both interest-sensitive activities. Therefore, the demand for money is likely downward sloping. Option B is incorrect because an increase in interest rates would negatively impact interest-sensitive consumption and business investment, not positively. Option C is not relevant to the concept of the demand for money. Option D is incorrect as it is not true that the government can always borrow what it wants.

The Demand for Money Is Likely Downward Sloping Because