An increase in expected inflation leads to a decline in money demand if

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An increase in expected inflation leads to a decline in money demand if market interest rates rise more than the interest paid on money balances. This is because people will prefer to hold less money since its purchasing power will decline as inflation increases. If market interest rates rise more than the interest paid on money balances, then it becomes more attractive to hold other types of assets (such as bonds) that offer higher returns, which in turn reduces the demand for money.

An Increase in Expected Inflation Leads to a Decline in Money