When the money market is depicted in a diagram with the value of money on the vertical axis, which of the following best describes the money demand function?
A)It slopes upward because at higher prices people want to hold more money.
B)It slopes downward because at higher prices people want to hold more money.
C)It slopes downward because at higher price people want to hold less money.
D)It slopes upward, because at higher prices people want to hold less money.

Question

Quizplus · Accepted Answer

The money demand function slopes downward because as the value of money decreases (i.e. prices increase), individuals and firms need to hold more money in order to make their transactions. This is because each unit of money is worth less, so they need more units of money to make the same purchases. Therefore, as the value of money decreases, the demand for money increases.

When the Money Market Is Depicted in a Diagram with the Value