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As interest rates rise, the quantity of money people wish to hold
Astays fixed by the RBI
Brises, since loans get costlier
Cfalls, since deposits pay more
Drises, since prices increase
Answer & Solution
Correct answer: C. falls, since deposits pay more
1. Holding money means forgoing the interest a deposit would pay.
2. Higher interest rates make that sacrifice larger.
3. People therefore hold less money, so demand **falls**.
4. A rise in income, not in interest, is what pushes money demand up, which is the confusion the other options invite.
_Source: NCERT Class 12 Introductory Macroeconomics, Ch 3 "Money and Banking", section 3.2 DEMAND FOR MONEY AND SUPPLY OF MONEY_
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