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WHY IS THE DEMAND CURVE FOR MONEY DOWNWARD SLOPING?THIS IS TEXTBOOK QUESTION.
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In order to understand this, you first need to remember what demand for money is. People demand money when they want to hold their wealth in money instead of in things like stocks. So demand for money is how much cash and checkable deposits people want to hold (out of the wealth that they have).
The price of money is the interest rate. When the interest rate is high, keeping your money in cash (rather than in bonds) costs you a lot of money (in opportunity costs). This is because you could be getting a lot of money in interest if you held your wealth in bonds rather than money.
So that is why the demand curve for money slopes downward -- higher interest rates make higher opportunity cost of holding your wealth in money.
Posted by pohnpei397 on May 23, 2010 at 7:45 AM (Answer #1)
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