The money demand curve is downward sloping because:

• A. lower interest rates make borrowing money less attractive
• B. higher interest rates increase the supply of money in the economy
• C. as the interest rate decreases, the opportunity cost of holding money falls, leading people to demand more money
• D. as the interest rate increases, people demand more money for transactions

Answer: (C)

Verified step by step guidance

1. Understand the concept of the money demand curve: it shows the relationship between the quantity of money people want to hold and the interest rate.
2. Recall that the interest rate represents the opportunity cost of holding money because money held as cash or in non-interest-bearing accounts does not earn interest.
3. Recognize that when interest rates decrease, the opportunity cost of holding money falls, so people are more willing to hold larger amounts of money for transactions and precautionary purposes.
4. Conversely, when interest rates increase, holding money becomes more costly in terms of forgone interest, so people reduce their money holdings and prefer to invest in interest-bearing assets.
5. Therefore, the money demand curve slopes downward because lower interest rates lead to higher money demand, reflecting the inverse relationship between interest rates and the quantity of money demanded.