1 The money demand curve shows a positivenegative relations

1. The money demand curve shows a _______ (positive/negative) relationship between the interest rate and quantity of money?

2. True or false: There is no cost of holding cash

3. Changes in the interest rate will cause a ________ (movement/shift) along/in the money demand curve

4. An increase in the price level will shift the money demand line _______ (upward/downward)

5. An increase in the money supply will cause the interest rate to ________ (decrease/increase)

Solution

1.  The money demand curve shows a negative relationship between the interest rate and quantity of money. This is evident from the downward sloping money demand curve.

2.  \"There is no cost of holding cash.\" This statement is false. This is because there is always an opportunity cost of holding money. Whenever a person holds money with himself, he foregoes the interest that he may be earning if he kept that money with the bank.

3.  Changes in the interest rate cause a movement along the money demand curve.

4.  An increase in the price level will shift money demand curve downwards which means that as there is an increase in the price level increases the money demand increases.

5.  An increase in the money supply will cause the interest rate to decrease. The equilibrium interest rate decreases while the equilibrium quantity of money increases.