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Supply of money remaining the same when there is an increase in demand for money, there will be
- a)A fall in the level of prices
- b)An increase in the rate of interest
- c)A decrease in the rate of interest
- d)An increase in the level of income and employment
Correct answer is option 'B'. Can you explain this answer?
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Supply of money remaining the same when there is an increase in demand...
Supply of money remaining the same when there is an increase in demand. With increase in demand for money, people will deposit less money in banks. Hence, banks will increase rate of interest to attract people to deposit money in bank.
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Supply of money remaining the same when there is an increase in demand...
Effect of Increase in Demand for Money when Money Supply Remains Constant
When there is an increase in demand for money and the supply of money remains constant, the following effects can be observed:
1. Increase in Interest Rates:
As people demand more money, the demand for credit also increases. This leads to an increase in interest rates as lenders try to match the demand for credit with the limited supply of money. Higher interest rates make borrowing more expensive, which reduces the demand for credit and money.
2. Decrease in Investment:
Higher interest rates also discourage investment, as borrowing costs increase. This reduces the overall level of investment in the economy, which can lead to lower economic growth and employment.
3. Decrease in Aggregate Demand:
As interest rates rise, the cost of borrowing for consumption also increases. This reduces the overall level of aggregate demand in the economy, as people are less willing to spend money on goods and services.
4. Increase in Savings:
Higher interest rates also encourage people to save more, as they can earn higher returns on their savings. This can lead to a decrease in consumption, as people spend less and save more.
5. Appreciation of Currency:
Higher interest rates can also lead to an appreciation of the currency, as foreign investors are attracted by higher returns on investments in the domestic economy. This can make exports more expensive and reduce the competitiveness of domestic firms.
Conclusion
In summary, when there is an increase in demand for money and the supply of money remains constant, the most significant effect is an increase in interest rates. This can have a range of negative effects on the economy, including lower investment, lower aggregate demand, and reduced economic growth and employment.
When there is an increase in demand for money and the supply of money remains constant, the following effects can be observed:
1. Increase in Interest Rates:
As people demand more money, the demand for credit also increases. This leads to an increase in interest rates as lenders try to match the demand for credit with the limited supply of money. Higher interest rates make borrowing more expensive, which reduces the demand for credit and money.
2. Decrease in Investment:
Higher interest rates also discourage investment, as borrowing costs increase. This reduces the overall level of investment in the economy, which can lead to lower economic growth and employment.
3. Decrease in Aggregate Demand:
As interest rates rise, the cost of borrowing for consumption also increases. This reduces the overall level of aggregate demand in the economy, as people are less willing to spend money on goods and services.
4. Increase in Savings:
Higher interest rates also encourage people to save more, as they can earn higher returns on their savings. This can lead to a decrease in consumption, as people spend less and save more.
5. Appreciation of Currency:
Higher interest rates can also lead to an appreciation of the currency, as foreign investors are attracted by higher returns on investments in the domestic economy. This can make exports more expensive and reduce the competitiveness of domestic firms.
Conclusion
In summary, when there is an increase in demand for money and the supply of money remains constant, the most significant effect is an increase in interest rates. This can have a range of negative effects on the economy, including lower investment, lower aggregate demand, and reduced economic growth and employment.
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Supply of money remaining the same when there is an increase in demand for money, there will bea)A fall in the level of pricesb)An increase in the rate of interestc)A decrease in the rate of interestd)An increase in the level of income and employmentCorrect answer is option 'B'. Can you explain this answer?
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Supply of money remaining the same when there is an increase in demand for money, there will bea)A fall in the level of pricesb)An increase in the rate of interestc)A decrease in the rate of interestd)An increase in the level of income and employmentCorrect answer is option 'B'. Can you explain this answer? for Defence 2024 is part of Defence preparation. The Question and answers have been prepared according to the Defence exam syllabus. Information about Supply of money remaining the same when there is an increase in demand for money, there will bea)A fall in the level of pricesb)An increase in the rate of interestc)A decrease in the rate of interestd)An increase in the level of income and employmentCorrect answer is option 'B'. Can you explain this answer? covers all topics & solutions for Defence 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Supply of money remaining the same when there is an increase in demand for money, there will bea)A fall in the level of pricesb)An increase in the rate of interestc)A decrease in the rate of interestd)An increase in the level of income and employmentCorrect answer is option 'B'. Can you explain this answer?.
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