Which statement best describes the Money Demand/Market Graph?

Which statement best describes the Money Demand/Market Graph?

• A. A graph showing the positive relationship between money demand and the interest rate
• B. A graph illustrating the money supply fixed by the central bank
• C. A graph showing the negative relationship between money demanded and the interest rate
• D. A graph depicting the relationship between inflation and unemployment

Answer: (C)

Money demand in the market is the amount of money people want to hold at different interest rates. The key idea is that money earns no interest, so when interest rates rise, the opportunity cost of holding money goes up. People would rather hold interest-bearing assets like bonds, so the quantity of money they want to hold falls. That makes the money demand curve downward-sloping: higher interest rates, lower money demanded. So the statement that describes the Money Demand/Market Graph best is that money demanded moves in a negative relationship with the interest rate. The other ideas don’t fit as well: money supply fixed by the central bank refers to the supply side, not the demand curve; a positive relationship would contradict how opportunity cost works; and inflation versus unemployment is about the Phillips curve, not money demand.

Money demand in the market is the amount of money people want to hold at different interest rates. The key idea is that money earns no interest, so when interest rates rise, the opportunity cost of holding money goes up. People would rather hold interest-bearing assets like bonds, so the quantity of money they want to hold falls. That makes the money demand curve downward-sloping: higher interest rates, lower money demanded.

So the statement that describes the Money Demand/Market Graph best is that money demanded moves in a negative relationship with the interest rate. The other ideas don’t fit as well: money supply fixed by the central bank refers to the supply side, not the demand curve; a positive relationship would contradict how opportunity cost works; and inflation versus unemployment is about the Phillips curve, not money demand.