Question

Money demand correlates with the following variable as follows:

negatively correlated with interest rate

positively correlated with the aggregate price level

negatively correlated with the real aggregate spending

answers (a, b, c) are correct

answers (a,b) are correct

Answer 1

Option E.

• Only the statements A and B are correct.
• Money demand refers to the quantity of money demanded by the people in the form of holdings for the purchase of their desired goods and services.
• It is negativity correlated with interest rate and positively correlated with the aggregate price level and aggregate spending.
• When the interest rates rise, the demand for holding money falls and vice versa. But when the price level increases, their demand for money increases to make purchases and vice versa.
• Money demand is positively correlated with the real aggregate spending. This is because, when the aggregate spending increases, the money demand increases as people purchase more goods or services and falls when spending decreases.