The demand for money is therefore positively related to nominal income. The interest rate is the opportunity cost of holding money. A higher interest rate means that it costs more to hold money, so less money will be held. A higher interest rate means that it costs more to hold money, so less money will be held. The demand for money is negatively related to the interest rate.
Monetary policy refers to controlling the money supply.
An increase in the money supply decreases interest rates, which increases consumption and investment. A decrease in the money supply increases interest rates, which decreases consumption and investment. Economic Resource Links Copyright Houghton Mifflin Company . All Rights Reserved.