The money demand curve has a negative slope because
A)lower interest rates cause households and firms to switch from money to financial assets.
B)lower interest rates cause households and firms to switch from financial assets to money.
C)lower interest rates cause households and firms to switch from money to stocks.
D)lower interest rates cause households and firms to switch from money to bonds.

Question

Quizplus · Accepted Answer

Lower interest rates reduce the opportunity cost of holding money as opposed to other financial assets, making money relatively more attractive. Therefore, households and firms will demand more money when interest rates are low and less when interest rates are high. This gives the money demand curve a negative slope. Choice A, C, and D are incorrect because they suggest that lower interest rates would cause people to move away from holding money, which is not consistent with the negative slope of the money demand curve.

The Money Demand Curve Has a Negative Slope Because