Question

Firms often seek to borrow money to expand their capital stock, and the price they pay for the money is the interest rate. What happens to quantity of money demanded if the interest rate increases

Answer 1

When interest rate rises, the quantity of money demanded reduces

Step-by-step explanation:

As interest rate increases firms seeking to borrow money for capital stock expansion are likely not going to go ahead with it. The reason is simply because, interest rate and money demanded have an inverse relationship. As interest rate rises money demanded falls because it means that for any amount of money borrowed the interest rate attached to it is higher making the cost of borrowing heavier on the borrower.