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

Answer: (b) an increase in the rate of interest

The answer is (b). The rate of interest is the price of holding money. If people want to hold more money and the supply is fixed, money becomes scarcer relative to demand. The interest rate has to rise until people are again willing to hold only the money that exists.

• ✗ (a) In the money market, the interest rate is the price that balances money demand against a fixed money supply. A change in the general price level is not the adjustment this situation produces.
• ✓ (b) People who want more money sell bonds or draw down interest-earning deposits. Bond prices fall and the market interest rate rises. At a higher rate, holding money costs more in interest given up, so the extra demand is choked off and the money market clears at a higher rate.
• ✗ (c) A lower rate of interest results when money supply increases: more money chasing bonds pushes bond prices up and the rate down. That is the opposite of what a rise in demand with fixed supply produces.
• ✗ (d) Higher interest rates make borrowing and investment costlier, so they do not raise income and employment. Income is a cause of money demand, not an outcome of this change.

Remember · Money demand up, money supply fixed → interest rate up. Money supply up, demand fixed → interest rate down. The interest rate is the 'price' of holding money.

📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter) · Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter)

Question: UPSC Civil Services (Preliminary) 2013, General Studies Paper I. Explanation: Minimalist IAS, checked 25 Oct 2026 (how we verify). · Report an error