Final answer:
Option dis the correct answer. When interest rates increase, the quantity of money the public wants to hold tends to decrease because people prefer to earn interest on their funds. Conversely, if the price level decreases, the value of money increases, which could lead to an increase in money demand.
Step-by-step explanation:
The question is asking how the amount of money the public wants to hold in the form of cash is influenced by changes in interest rates or the price level. According to financial theory, the laws of demand and supply dictate that as interest rates increase, the opportunity cost of holding money increases, because money held in cash does not earn interest. Thus, the public is less inclined to hold money in cash form and more likely to invest or deposit it in interest-bearing accounts. Therefore, the correct answer is (c) decrease if interest rates increase, because people tend to reduce their cash holdings in favor of assets that generate higher returns. Additionally, expected changes in the price level can influence money demand. Specifically, if people expect prices to fall (deflation), holding cash becomes more attractive because its purchasing power increases with falling prices. However, if the price level decreases, the value of cash held increases, which could theoretically lead to an increase in money demand, aligning with answer (d).