Which of the following is true of the quantity of money demanded?

• A. It always remains constant regardless of income.
• B. It is unaffected by changes in the price level.
• C. It generally increases as the interest rate decreases.
• D. It decreases when the opportunity cost of holding money falls.

Answer: (C)

Verified step by step guidance

1. Understand the concept of the quantity of money demanded: it refers to how much money people want to hold at a given time, balancing the benefits of liquidity against the costs of holding money instead of interest-bearing assets.
2. Recall that the opportunity cost of holding money is the interest rate, because holding money means forgoing interest that could be earned by holding other assets.
3. Analyze the relationship between the interest rate and the quantity of money demanded: when the interest rate decreases, the opportunity cost of holding money falls, so people are more willing to hold larger quantities of money.
4. Recognize that the quantity of money demanded generally increases as the interest rate decreases, because lower interest rates reduce the cost of holding money.
5. Evaluate the other options: quantity of money demanded does not remain constant regardless of income, it is affected by changes in the price level (higher prices usually increase money demand), and it does not decrease when the opportunity cost of holding money falls—in fact, it increases.