The money demand curve:
A) slopes downward with respect to the discount rate.
B) slopes downward with respect to the nominal interest rate.
C) slopes upward with respect to the nominal interest rate.
D) always is flat with respect to the nominal interest rate.
E) is flat with respect to the inflation rate.

Question

Quizplus · Accepted Answer

The money demand curve shows the quantity of money demanded at different interest rates. As the nominal interest rate increases, the opportunity cost of holding money increases, and thus the quantity of money demanded decreases. Therefore, the money demand curve slopes downward with respect to the nominal interest rate. Choice A is incorrect because the discount rate is not typically used as a measure of the cost of holding money. Choice C is incorrect because the opposite is true; the money demand curve slopes upward with respect to the real interest rate. Choice D is incorrect because it is not always the case; the shape of the money demand curve can vary depending on the circumstances. Choice E is incorrect because the money demand curve is not flat with respect to the inflation rate.

The Money Demand Curve