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Supply of money remaining the same when there is an increase in demand

June 1, 2025 by rawan239

Supply of money remaining the same when there is an increase in demand for money, there will be

a fall in the level of prices

an increase in the rate of interest

a decrease in the rate of interest

an increase in the level of income and employment

This question was previously asked in

UPSC IAS – 2013

Download PDF Attempt Online

When the supply of money remains the same and there is an increase in the demand for money, it leads to an increase in the rate of interest.

In the money market, the demand for money (Md) is inversely related to the interest rate, while the supply of money (Ms) is typically considered fixed by the central bank. If the demand for money increases (shifts right) while the supply is fixed, the equilibrium in the money market shifts to a higher interest rate, as people are willing to pay more to hold money or borrow funds.

This concept is explained by theories of money demand, such as the Keynesian liquidity preference theory, which posits that individuals hold money for transactional, precautionary, and speculative motives. A higher demand for money, for whatever reason (e.g., increased economic activity, higher expected inflation), ceteris paribus, drives up the cost of holding or borrowing money, which is reflected in the interest rate.

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