What is the relationship between interest rate and demand for money?

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Accepted Answer

1. Demand for money (liquidity preference) depends on income and interest rate: $M_d = L(Y,i)$. 
2. The interest rate $i$ is the opportunity cost of holding money (foregone interest from bonds).
3. As $i$ rises, people prefer interest-bearing assets over money, so money holdings fall: $\frac{\partial M_d}{\partial i}<0$.
4. Therefore the relationship between interest rate and demand for money is inverse (option 2). 
FINAL_ANSWER: b

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