As the "P" the price level falls:

A. households want to lend more, so the interest rate rises making the quantity of goods and services demanded rise.

B. households want to lend more, so the interest rate falls, making the quantity of goods and services demanded rise.

C. households want to lend more, so the interest rate rises, making the quantity of goods and services demanded fall.

Question

Lauren Hawkins

Business

10 July, 13:41

As the "P" the price level falls:

A. households want to lend more, so the interest rate rises making the quantity of goods and services demanded rise.

B. households want to lend more, so the interest rate falls, making the quantity of goods and services demanded rise.

C. households want to lend more, so the interest rate rises, making the quantity of goods and services demanded fall.

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Answers (1)

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Caitlin Bowers · Answer 1

B. households want to lend more, so the interest rate falls, making the quantity of goods and services demanded rise.

Explanation:

Money is demanded for 3 purposes : Transaction demand (for buying selling), precaution demand (for contingencies), speculative demand (for investment gains)

As prices fall & things get cheaper, money demanded for transaction purposes fall. It leads to money being demanded more for precautionary & speculative purpose. This implies that households would lend money more, to earn more in form of interests. However, this increase in money funds supply will reduce their price i. e their interest. Interest rate is the opportunity cost sacrifised for money consumed. Low interest rate means low opportunity cost of money consumption. So, it will be demanded more for spending on goods & services, goods & services demand will rise.