Question

Demand for money remaining the same, an increase in supply of money will result in _________.

• A. A rise in the level of prices.
• B. A rise in the rate of interest.
• C. A decrease in level of income and employment.
• D. None of the above.

Answer 1

The correct option is A A rise in the level of prices.

Money demand (also known as liquidity preference) refers to holding money in hand for the purpose of exchange. Change in money demand influences the level of interest rates in the economy. An increase in money demand keeping the money supply constant will lead to rising in interest rates thus increasing the level of prices.