UPSC CSE Prelims
Question 96
Supply of money remaining the same when there is an increase in demand for money, there will be
View correct answer and explanation
Correct answer: B
Correct Option: B
Explanation: When money supply is fixed and people wish to hold more money, interest rates tend to rise to equilibrate money demand and money supply.
Option-wise Analysis:
A: Incorrect - Not the direct liquidity-market implication: a general fall in prices may change real balances but is not the immediate equilibrium response.
B: Correct - Correct: higher demand for money with unchanged supply raises the price of liquidity, the interest rate.
C: Incorrect - Wrong: lower interest rates would increase money demand further rather than clear the shortage.
D: Incorrect - Wrong: higher income itself raises transaction demand and does not solve the fixed-money shortage.