Question:
Households demand more money balances as an asset when
(1) general price level increases.
(2) nominal National income falls.
(3) nominal National income increases.
(4) nominal interest rate falls.
(5) bond prices fall.
Correct Answer:
(4)
Answer Explanation:
Demand for money as an asset (speculative demand) is inversely related to the interest rate. When nominal interest rates fall, the opportunity cost of holding idle cash is low, and bond prices are high (meaning expected future returns on bonds are poor), so households prefer to hold more liquid money.
Topic: Money and Banking Year: 2021
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