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- Macroeconomic Policy Toolseconomics-mcqs › macroeconomic-policy-tools
- Published
- 31 May 2019
- Last updated
- 28 May 2026
On a graph where the interest rate is plotted on the vertical axis and the quantity of money on the horizontal axis, what happens to the quantity of money demanded when the interest rate rises?
Multiple choice question for Macroeconomic Policy Tools. Select an option, then review the explanation below.
Explanation
When the interest rate goes up, holding everything else constant, the opportunity cost of holding money increases. As a result, people reduce the amount of money they want to hold, leading to a decrease in the quantity of money demanded. This is a movement along the demand curve, not a shift in demand.
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Practice related questions from the same subject.
- 1.Which of the following functions as an automatic economic stabilizer?
- 2.If the government raises its spending by Rs16 billion and the multiplier effect outweighs the crowding out effect, what will be the impact on the economy?
- 3.Which economic phenomenon is illustrated when higher government spending boosts income, shifts the demand for money to the right, increases interest rates, and consequently reduces investment?
- 4.What is the effect of an increase in the marginal propensity to consume (MPC) on the multiplier?
- 5.What is the immediate effect of a rise in government expenditure on the economy?