Why C is not correct statement? As interest rates rise, people who hold money will invest to exploit better interest rates. I guess the answer was money constant. Could you please explain what is exactly money here. ----------------------------------- Which of the following statements about the demand for and supply of money is least accurate? A) As gross domestic product rises, the demand for money balances also rises. B) As the interest rate rises, the demand for money falls. C) As the interest rate rises, the supply of money also rises. D) As inflation rises, the demand for money by households and businesses also rises. Your answer: D was incorrect. The correct answer was C) As the interest rate rises, the supply of money also rises. The supply of money is determined by the monetary authorities and is not affected by changes in interest rates. Thus, the supply of money curve is vertical.
The supply of money is regulated by the Federal Reserve. Thus, an increase in interest rates would affect demand, but not supply. I believe money in this sense is the monetary base correct? Currency, checks, and travelers checks or something along those lines.
Also, don’t get this confused with the supply and demand of savings in the capital market. Ex…as interest rates rise there is more supply of capital in the savings market as people will hold less cash in hopes of earning more interest.
Sometimes it is helpful to think through the open market operations required to raise (or reduce) interest rates. To increase interest rates, the federal reserve would need to sell treasury securities. The buyers of these securities would be handing cash over to the government, reducing the money supply. The result of the sales would be to reduce the price of treasury securities, increasing yields. Thus, higher interest rates and a decrease in the supply of money go hand in hand. We can also consider the opposite case where the government wishes to decrease interest rates. To do so it needs to buy treasury securities. In buying securities, it is giving the sellers’ cash they didn’t have before, increasing money supply. The heightened demand for treasury securities causes their price to increase and yields to fall. The result is lower interest rates and increased money supply.