Why is the demand for real money balances downward sloping?
A)because the opportunity cost of holding money decreases as interest rates decrease
B)because when the interest rate falls the quantity of money demanded increases
C)because lower interest rates encourage firms and households to increase their money holdings
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

The demand for real money balances is downward sloping because all of the above reasons are true. As interest rates decrease, the opportunity cost of holding money decreases, which encourages people to hold more money. Additionally, when interest rates fall, the quantity of money demanded increases. Lower interest rates also encourage firms and households to increase their money holdings. All of these factors contribute to the downward sloping demand curve for real money balances.

Why Is the Demand for Real Money Balances Downward Sloping