According to liquidity-preference theory, why is the money-demand curve downward sloping?
A) because interest rates rise as the Bank of Canada reduces the quantity of money demanded
B) because interest rates fall as the Bank of Canada reduces the supply of money
C) because people will want to hold less money as the cost of doing so falls
D) because people will want to hold more money as the cost of doing so falls

Question

Quizplus · Accepted Answer

According to liquidity-preference theory, the money-demand curve is downward sloping because people will want to hold more money as the cost of doing so falls. As interest rates decrease, the opportunity cost of holding money decreases, which makes holding money relatively more attractive compared to other assets. Therefore, the quantity of money demanded increases as the interest rate falls, resulting in a downward sloping money-demand curve.

According to Liquidity-Preference Theory, Why Is the Money-Demand Curve Downward