When the nominal interest rate falls, there is
A) an upward movement along the demand for money curve.
B) a downward movement along the demand for money curve.
C) a rightward shift of the demand for money curve.
D) a leftward shift of the demand for money curve.
E) no movement along the demand for money curve and the curve does not shift.

Question

Quizplus · Accepted Answer

When the nominal interest rate falls, holding all other factors constant, people will demand more money to enjoy liquidity. However, the quantity of money demanded has increased while the interest rate remains fixed, leading to a surplus in the money market. To equate the supply and demand for money, people may be willing to hold money because its opportunity cost (interest rate) has decreased and lower interest rates are associated with greater liquidity. Therefore, there will be a downward movement along the demand for money curve.

When the Nominal Interest Rate Falls, There Is