Supply of money remaining the same when there is an increase in demand for money, there will be

[UPSC Civil Services Exam – 2013 Prelims]

(a) a fall in the level of prices

(b) an increase in the rate of interest

(c) a decrease in the rate of interest

(d) an increase in the level of income and employment

Answer: (b)        

Explanation:

The supply of money remaining the same when there is an increase in demand for money, there will be an increase in the rate of interest. This occurs in order to attract customers and initiate deposits among them by the banks.

Increased interest rates:

• ​It will slow down economic growth and control the inflationary pressure.
• It will reduce disposable income and increase the cost of borrowing.
• It will bring appreciation to the exchange rate.
• It will lead to more savings than spending.
• May give rise to unemployment.

Decreased interest rate:

• It will boost economic growth and inflation increases.
• It will bring depreciation to the exchange rate.
• The cost of borrowing will become cheaper.
• It will promote more spending than saving.
• The situation of unemployment decreases.