Question

When the interest rate is very low (well below what would be considered normal), households and firms will expect the rate to rise in the long run. How does this affect the demand for holding money in the present?

A) Increases the demand for holding money
B) Decreases the demand for holding money
C) Has no effect on the demand for holding money
D) Shifts the demand for money from households to firms

Answer 1

When interest rates are very low and expected to rise in the long run, the demand for holding money in the present decreases.

Step-by-step explanation:

When the interest rate is very low, households and firms will expect the rate to rise in the long run. This expectation of rising interest rates affects the demand for holding money in the present. In this case, the demand for holding money decreases. This is because when interest rates are low, there is less incentive to hold money as it does not provide significant returns. Instead, households and firms may choose to invest or spend their money in other ways.