Which of the following best describes the relationship shown by the demand for money?

Choose 1 answer:
(A) People are more willing to hold money when the opportunity cost of holding money increases
(B) Money becomes less liquid as interest rates increase
(c) When the price level increases, the amount of money people want to hold increases
(D) Banks are more willing to create money when interest rates are high
(E) A tradeoff exists between earning interest and the transactions motive

Question

Which of the following best describes the relationship shown by the demand for money?

Choose 1 answer:
(A) People are more willing to hold money when the opportunity cost of holding money increases
(B) Money becomes less liquid as interest rates increase
(c) When the price level increases, the amount of money people want to hold increases
(D) Banks are more willing to create money when interest rates are high
(E) A tradeoff exists between earning interest and the transactions motive

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ The demand for money is influenced by several factors, including the price level. ‖ ‖ step 2 ⋮ When the price level increases, the amount of money people want to hold also increases because they need more money to carry out transactions. ‖ ‖ step 3 ⋮ This relationship is described by the liquidity preference theory, which states that people hold money for transaction purposes, and higher prices require more money for the same transactions. ‖ ***C*** ∻Key Concept∻ ⚹Liquidity Preference Theory⚹ ∻Explanation∻ ⚹The liquidity preference theory explains that as the price level increases, people need to hold more money to conduct the same amount of transactions, thus increasing the demand for money.⚹◊What statistical methods can be used to analyze the relationship between demand for money and factors such as interest rates, price level, and opportunity cost⍭ Generate me a similar question◊

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