Question

What would be the change in demand for money for transaction purposes due to rise in prices?

• A. Increase
• B. Decrease
• C. Remain constant
• D. All of these

Hint:

As prices rise, the demand for money increases because more money is needed for the same transactions.

Answer 1

The Correct Option is A

Step 1: Understanding the relationship between price rise and money demand.
As prices rise, individuals and businesses require more money for transactions. This is due to the fact that higher prices increase the amount of money needed to purchase the same quantity of goods and services. Therefore, an increase in prices leads to an increase in the demand for money for transaction purposes.

Step 2: Analyzing the options.
(A) Increase: Correct. The demand for money increases as prices rise because more money is needed for transactions at higher prices.
(B) Decrease: Incorrect. A decrease in prices would lead to a decrease in the demand for money, but higher prices do the opposite.
(C) Remain constant: Incorrect. The demand for money does not remain constant when prices rise.
(D) All of these: Incorrect, as only (A) is correct.

Step 3: Conclusion.
The demand for money for transaction purposes will increase due to a rise in prices.