he quantity of money demanded 50) a) varies directly with interest rates. b) varies inversely with interest rates. c) is unaffected by interest rates. d) none of the above are correct.

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20-12-2022
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he quantity of money demanded 50) a) varies directly with interest rates. b) varies inversely with interest rates. c) is unaffected by interest rates. d) none of the above are correct.

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qwcricket qwcricket · Answer 1 · 2022-12-27T08:25:38+01:00

The quantity of money demanded b) varies inversely with interest rates

Interest rates affect the demand for money in an opposite manner. The quantity theory of money asserts that amount of money required is inversely related to the interest rate. Businesses are less likely to borrow and spend money when interest rates are high because borrowing money is more expensive. Thus, there is less need for cash. When interest rates are low, borrowing money is less expensive, which increases the likelihood that individuals and businesses would borrow and spend money. The need for cash rises as a result.

This inverse relationship between money demanded and interest rates are vital as it can help policymakers anticipate how changes in interest rates may affect the economy. For example, if the central bank raises interest rates, it may lead to a decrease in the demand for money and a slowdown in economic activity. Whereas, if the bank lowers interest rates, it may lead to an increase in the demand for money and an acceleration in economic activity.