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The Demand for Money quiz

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  • What does the theory of liquidity preference state about interest rates?
    The theory of liquidity preference states that interest rates adjust to balance the supply and demand for money.
  • On a money demand graph, what does the y-axis represent?
    The y-axis represents the interest rate, which is the price of borrowing money.
  • Why does the money demand curve slope downward?
    It slopes downward because as interest rates decrease, the quantity of money demanded increases.
  • What is the opportunity cost of holding money?
    The opportunity cost is the interest you forgo by holding cash instead of investing it.
  • What happens to the quantity of money demanded when interest rates rise?
    When interest rates rise, the quantity of money demanded decreases.
  • What causes movement along the money demand curve?
    A change in the interest rate causes movement along the money demand curve.
  • What causes the money demand curve to shift?
    Factors other than the interest rate, such as changes in price level or real GDP, cause the money demand curve to shift.
  • How does an increase in the price level affect money demand?
    An increase in the price level increases the demand for money, shifting the demand curve to the right.
  • How does a decrease in the price level affect money demand?
    A decrease in the price level decreases the demand for money, shifting the demand curve to the left.
  • What happens to money demand when real GDP increases?
    When real GDP increases, money demand increases because more transactions require more cash.
  • If it becomes easier to invest money (e.g., via a phone app), what happens to money demand?
    Money demand decreases, shifting the demand curve to the left, because people prefer to invest rather than hold cash.
  • What does a rightward shift in the money demand curve indicate?
    A rightward shift indicates an increase in the demand for money at every interest rate.
  • What does a leftward shift in the money demand curve indicate?
    A leftward shift indicates a decrease in the demand for money at every interest rate.
  • Why might someone choose to hold less money when interest rates are high?
    Because the opportunity cost of holding money is higher, so they prefer to invest and earn interest.
  • What is meant by 'ceteris paribus' in the context of money demand?
    'Ceteris paribus' means holding all other factors constant except the one being analyzed, such as the interest rate.