Concept:The demand for money falls when the opportunity cost of holding money increases, which happens when interest rates rise.
Explanation:Money is held for transactions, precautionary needs, and speculation.
When the real interest rate rises, holding cash becomes more expensive because savers forgo higher returns on interest-bearing assets.
As a result, people reduce their speculative money balances, so the total demand for money falls.
Expecting deflation makes money more valuable over time, so people prefer to hold more money, not less.
A rise in real GDP increases income and thus raises the transactions demand for money.
Similarly, a higher GDP deflator means a higher price level, which increases the amount of money needed for everyday purchases.
Therefore, the only condition that reduces money demand is an increase in the real interest rate.
Answer:C. Real interest rates rise