In a two-asset economy with money and T-bills, the quantity of money that people will want to hold, other things being equal, can be expected to:
A) decrease as real GDP increases.
B) increase as the interest rate decreases.
C) increase as the interest rate increases.
D) all of the above.

Question

Quizplus · Accepted Answer

According to the theory of money demand, the quantity of money demanded is inversely related to the interest rate. As interest rates decrease, people find it less attractive to hold T-bills because they provide lower returns. As a result, people will hold a larger quantity of money instead. The quantity of money demanded does not have a direct relationship with real GDP, so option A is incorrect. Option C is also incorrect since it suggests that people will hold more money as the interest rate increases, which is contrary to the theory of money demand.

In a Two-Asset Economy with Money and T-Bills, the Quantity