Question

Which of the following aspects does not increase the demand for money?

A. Increase in the current wealth

B. drop in the interest rate on checking account

C. drop in the return on stocks

D. drop in the liquidity of the secondary market for bonds

please explain, i'm confused

Answer 1

Option B is correct

money demand is a function of many variables but in the context of money market demand is a function of interest rate. If there is a drop in the interest rate on checking account it implies that the opportunity cost of holding money has reduced and therefore people will hold more money. This will cause a movement along the money demand curve instead of a shift which is necessary in case of increase in money demand. Therefore other options will increase money demand but option B will cause movement along the curve.