Why is the demand for money downward sloping?
Understand the Problem
The question is asking about the relationship between the demand for money and its variables, specifically why it tends to decrease as certain factors change, likely relating to interest rates and liquidity preference.
Answer
The inverse relationship between interest rates and the quantity of money demanded.
The final answer is the inverse relationship between interest rates and the quantity of money demanded.
Answer for screen readers
The final answer is the inverse relationship between interest rates and the quantity of money demanded.
More Information
The demand for money is downward sloping primarily due to an inverse relationship between the interest rate and the quantity of money demanded. As interest rates rise, the opportunity cost of holding money increases, which leads to a decreased demand for money.
Tips
Avoid confusing the demand for money with overall economic demand; the former specifically deals with liquidity and interest rates.
Sources
- Money Demand Curve: Graph, Shifts, Definition & Examples - Vaia - vaia.com
- 25.2 Demand, Supply, and Equilibrium in the Money Market - open.lib.umn.edu
- Demand curve for money in the money market (video) | Khan Academy - khanacademy.org
