Final answer:
Money demand decreases with higher interest rates because interest rate is the cost of holding money. The correct answer is option a.
Step-by-step explanation:
The question asks why money demand decreases when interest rates rise. The correct answer to this question is 'a. interest rate is the cost of holding money'. When interest rates increase, the opportunity cost of holding money instead of putting it into an interest-bearing account or investment becomes higher. People and businesses are therefore incentivized to hold less cash and to save or invest more, leading to a decrease in the demand for money.
Additionally, in terms of changes in the financial market that lead to a decline in interest rates, the correct answer is 'C. a rise in supply'. When there is an increase in available loanable funds, this indicates that there are more people or institutions wanting to lend money. The increase in supply of these funds will lead lenders to reduce the price of borrowing, which is expressed as the interest rate, to attract borrowers.