Final answer:
When interest rates fall, the quantity of money demanded increases and people tend to hoard their money. Money demand types include precautionary, speculative, and transactions demand. The True statement about the money demand curve is that the transactions demand drives the downward-sloping portion.
Step-by-step explanation:
When interest rates on bonds and other assets fall, there will be an increase in the quantity of money demanded, and people will hoard their balances. The various types of money demand include:
- Precautionary demand: The stock of money people hold to pay unpredictable expenses.
- Speculative demand: The stock of money held to take advantage of expected future changes in the price of bonds, stocks, or other nonmoney financial assets.
- Transactions demand: The stock of money people hold to pay everyday, predictable expenses.
The demand for money curve graphs the quantity of money on the vertical axis and the interest rate on the horizontal axis. To find the equilibrium of the specific money demands, you must take into account both axes.
Regarding the statement given, the downward-sloping portion of the money demand curve is driven by the transactions demand for money. This statement is True.
According to the laws of demand and supply, as interest rates increase, consumers will borrow less, reducing the quantity demanded. Conversely, if the interest rate falls, the quantity demanded will increase, which is consistent with the demand curve in financial markets. Similarly, the law of supply dictates that at higher prices (or interest rates), the quantity of credit card borrowing supplied would increase.
In summary, these economic principles govern the equilibrium in financial markets, where the supply and demand curves cross, indicating the balance between the quantity of funds supplied and demanded.