The demand for money will fall if

1. Analyze the question We need the factor that causes the demand for money (the desire to hold cash and liquid balances) to fall.

2. Concept People hold money for three motives (Keynes):

• Transactions motive: depends on income and price level. Higher real GDP or higher prices means more money is needed for buying and selling.
• Precautionary motive: also rises with income.
• Speculative motive: depends on the interest rate. The interest rate is the opportunity cost of holding money. Money in hand earns nothing, while bonds and savings earn interest.

3. Test each option

• A. People expect deflation soon. When prices are expected to fall, money gains purchasing power, so people want to hold more of it and delay spending. Demand for money rises, not falls.
• B. Real GDP rises. Higher output and income means more transactions, so demand for money rises.
• C. Real interest rates rise. Holding money becomes more costly because you give up a higher return. People shift from cash into bonds and savings, so demand for money falls.
• D. The GDP deflator rises. A rising deflator means a higher price level, so more money is needed for the same transactions. Demand for money (nominal) rises.

4. Answer Only a rise in the real interest rate reduces money demand, because of the higher opportunity cost of holding cash.

5. Exam tip Remember: interest rate and money demand move in opposite directions, while income, prices and transactions move with money demand. Whenever JAMB asks what makes money demand fall, check first for "interest rate rises".