All other things unchanged, we expect that a reduction in interest rates will tend to
A) increase the quantity of money demanded and increase velocity.
B) increase the quantity of money demanded and reduce velocity.
C) reduce the quantity of money demanded and increase velocity.
D) reduce the quantity of money demanded and reduce velocity.

Question

Quizplus · Accepted Answer

When interest rates are reduced, individuals and firms have lower opportunity costs of holding money balances and thus demand for money increases. This leads to an increase in the quantity of money demanded, but also a reduction in the velocity of money as individuals and firms are holding onto their money balances for longer periods of time.

All Other Things Unchanged, We Expect That a Reduction in Interest