Why does an increase in real interest rates lead to a decrease in demand for money?

As i was reading S2000magician’s blog on the LM curve, i came across the statement that assuming all else remains equal, as real interest rates rise, demand for money decreases.

In my simple mind, i would think that high interest rates would result in an increase in demand for money because we could deposit the money in that country to enjoy the high interest rates?

Thanks for the clarification in advance.

An increase in the interest rate makes it more expensive / less attractive to borrow money, hence a decrease in the demand.

In addition to above (from the borrowers perspective), you can also think in terms of the consumers perspective.

It makes people want to save more (due to high interest rates), and increases the marginal cost of consumption. Therefore, people will consume less, and therefore, demand less money to pay for the goods they will no longer purchase.

Assuming a normal (downward sloping) demand curve, when the cost of something (anything) increases, demand for that something decreases.

Interest is the cost of money, and the demand for money is the demand to _ borrow _ money.

I can see clearly now…thanks for everyone’s input! smiley

My pleasure.