Suppose, the aggregate demand for money-holding is L = 0.25Y - 100i, where Y is the real GDP and i is the interest rate. When we draw the above money demand function with interest rate in the vertical axis, we can see one of the following outcomes:

Question

Quizplus · Accepted Answer

DB) When the real money-balance-fraction increases from 0.25 to 0.50, it means that for a given level of income, people want to hold more money. This increases the demand for money at every interest rate, shifting the money demand curve to the right.D) The given function shows that the demand for money is inversely related to the interest rate (as indicated by the -100i term). When the interest rate increases, the cost of holding money (in terms of foregone interest) increases, leading to a decrease in the quantity of money demanded. This does not shift the money demand curve itself but moves along it. However, since the question's phrasing might suggest how the relationship between interest rate and money demand is visualized in terms of curve movement, it's important to clarify that an increase in interest rates is associated with a movement up along the curve, not a shift. The correct interpretation of how these dynamics are typically discussed in economics would be that higher interest rates lead to lower money demand, but the curve itself does not shift due to changes in the interest rate.

Suppose, the Aggregate Demand for Money-Holding Is L = 0