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Relationship between interest rates and the demand for money

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About the relationship between interest rates and the demand for money I have to say that it is missing a factor called confidence. Many economists have said before that if the rate declined, the demand for money will rise and the contrary would be true. However, real life even if rates declined to historically low rates, if there is no business confidence, the demand for money will decline. This happened in the US during 2002 and 2003. If on the other hand rates increase, but confidence stays high, business will continue borrowing.

Today, rates have declined drastically and business lending and borrowing remains low given poor business confidenceâ?¦

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Solution Summary

The relationship between interest rates and the demand for money is explained in detail. The reasons why businesses decide to borrow money are explained. The reasons why businesses decide against borrowing money are also explained.

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Business lending and borrowing remains low even when rates are declining because business confidence is very low. Businesses are not comfortable with borrowing money or growing if consumers and other businesses' purchases slow down. Buying is slowing because several people are out of work, gas prices are high, and many people have to cut back on their expenses. High gas prices can affect the amount businesses have to spend in other areas and it increases the costs of goods for businesses and consumers. Businesses and managers are also taxed with doing more with less, ...

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