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
Explanation
Option (b) is correct
- When the demand for money increases while the supply of money remains constant, there is a shortage of liquidity in the economy. People prefer to hold more cash (for transactions, precaution, or speculation), which reduces the availability of money for lending. As a result, to balance this higher demand with the unchanged supply, the rate of interest rises. Higher interest rates discourage borrowing and encourage saving, thereby restoring equilibrium in the money market. Thus, the immediate effect is an increase in the rate of interest, making option (b) correct.
