ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -As the interest rate falls, money demand will rise. Once it rises to equal the new money supply, there will be no further difference between the amount of money people hold and the amount they wish to hold, and the story will end. This is why (and how) an increase in the money supply lowers the interest rate. 2.

Detailed explanation-2: -A fall in interest rates increases the amount of money people wish to hold, while a rise in interest rates decreases that amount. A change in prices is another way to make the money supply equal the amount demanded.

Detailed explanation-3: -When interest rates rise, it becomes more “expensive” to borrow money. That borrowed money would typically go toward consumer expenditures and capital investment, and so these two sectors diminish under higher interest rates. Therefore aggregate demand decreases, per the equation.