Why does the higher the interest rate, the greater the demand for money?

1, under the condition of static equilibrium:

When interest rate is expected to be high, income remains unchanged, money demand increases, interest rates rise, and money supply equals the trajectory of various combinations of income and interest rates, people's willingness to acquire and hold money is strengthened. LM curve is represented by money market. The premise of LM is that supply equals demand, and money demand is rising.

2, under the condition of dynamic balance:

The increase in interest rates means that the growth rate of the total amount of money is accelerated, and the growth rate of the total amount of money is accelerated and the total amount is larger.

In real life, we can see that when interest rates rise, everyone is willing to deposit money in safer banks to earn bank interest, the currency in circulation will decrease, the demand for funds by enterprises will increase due to supply, and private lending will flourish.

Extended data

Interest rate theory:

Generally speaking, interest rates are expressed by annual interest rate, monthly interest rate and daily interest rate.

In modern economy, interest rate, as the price of capital, is not only restricted by many economic and social factors, but also has a great influence on the whole economy. Therefore, modern economists pay special attention to the relationship between various variables and the balance of the whole economy when studying the decision of interest rate. Interest rate determination theory has also experienced the evolution and development of classical interest rate theory, Keynesian interest rate theory, loanable funds interest rate theory, IS-LM interest rate analysis and contemporary dynamic interest rate model.

Keynes believed that savings and investment are two interdependent variables, not two independent variables. Keynes regarded interest rate as an exogenous variable without interest rate elasticity, in which the money supply was controlled by the central bank. At this time, the demand for money depends on people's psychological "liquidity preference". Then loanable funds's interest rate theory is the interest rate theory of neoclassical school, which was put forward to revise Keynes's "liquidity preference" interest rate theory. To some extent, loanable funds's interest rate theory can actually be regarded as the synthesis of classical interest rate theory and Keynesian theory.

Hicks, a famous British economist, and others think that the above theory does not consider the income factor, so it is impossible to determine the interest rate level, so they put forward the IS-LM model based on the general equilibrium theory in 1937. Thus, a theory that interest rate and income are determined simultaneously under the interaction of savings and investment, money supply and money demand is established.

According to this model, the determination of interest rate depends on four factors: savings supply, investment demand, money supply and money demand, and all factors that lead to changes in savings investment and money supply and demand will affect the interest rate level. The characteristic of this theory is general equilibrium analysis.

Under the strict theoretical framework, this theory organically unifies the commodity market equilibrium of classical theory and the money market equilibrium of Keynes theory. Marx's interest rate determination theory considers the role of institutional factors in interest rate determination from the perspective of the source and essence of interest, and its theoretical core is that interest rate is determined by average profit rate. According to Marx, under the capitalist system, interest is a part of profit and a transformation form of surplus value.

The independence of interests is of positive significance to truly show the dynamic role played by capital users in the process of reproduction.

Baidu encyclopedia-interest rate