Question

First, explain why the money demand curve is downward sloping. Second, explain what factor(s) will cause shifts in the money demand curve.

Answer 1

Money Demand generally speaks about speculative demand of money for instance Let us think in terms of opportunity cost

When we hold money we have an opportunity cost of forgo interest we would have earned if the sum is kept in bank deposit.Hence this opportunity cost in terms of interest rate increaes with increase in interest rate and speculative demand i.e money demand goes down and similarly in opposite case when rates go down there is small opportunity cost for forgo when we hold money hence demand for money is high when interest goes down therefore dMd/di<0

Hence Money Demand curve is always downward sloping.

Factors impacting money demand curve

1) Change in expectations

2) Change in relative prices of good

3) Change in Interest rate