Question : Which of the following statements is/are correct concerning the demand for money?
i. When the interest rate is high, the demand for money is low.
ii. When the interest rate is low, demand for money is also low.
iii. When the interest rate is high, demand for money is also high.
iv. When the interest rate is low, demand for money is high.
Option 1: Only ii and iv
Option 2: Only i and iv
Option 3: Only ii and iii
Option 4: Only i and ii
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Correct Answer: Only i and iv
Solution : The correct answer is Only i and iv .
When the interest rate is high, the demand for money is low because people are more inclined to save in interest-bearing accounts rather than hold cash, which doesn't yield any interest. When the interest rate is low, demand for money is high as the opportunity cost of holding cash is lower, and people may prefer to keep more cash on hand for transactions. As interest rates rise, the demand for money decreases because the opportunity cost of holding cash increases.
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