Which of the following statements about the demand and supply of money is most accurate? People who are: A) holding money when interest rates are lower will try to increase their money balances and, as a result, the supply of money increases. B) buying bonds to reduce their money balances will increase the demand for bonds with an associated increase in interest rates. C) holding money when interest rates are higher will try to reduce their money balances and, as a result, the demand for money decreases. Your answer: A was incorrect. The correct answer was C) holding money when interest rates are higher will try to reduce their money balances and, as a result, the demand for money decreases. Buying bonds would drive bond prices up and interest rates down. Selling bonds would have the opposite effect; driving bond prices down and interest rates up. When interest rates are lower, there is an excess demand for money. The supply of money is determined by the monetary authorities. ------------ I’m not sure I’m even understanding this question properly. I always have trouble with money supply / inflation / econ no matter how many times I go through it 
The way I see it… Why would someone want to Reduce their money balances when interest rates are high? Doesn’t that mean if they deposit money into a savings account it will then earn a high interest rate return? Apologies if I’m not thinking about this properly. I find economics too theoretical for me…
In this context think of money balances as ‘cash on hand’ or ‘cash balances’. When interest rates are high, you would want to deposit the money in the bank, hence reducing your money (cash) quantity demanded. Question is wrong. Money demand does not increase. Money quantity demanded increases (movement along the curve) Disclaimer: It’s really late so I’ll re-read this in the morning and get back to you.