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

1. The question describes a situation where the supply of money remains constant (same), while the demand for money increases. 2. Money, like any commodity, has a price. The 'price' of holding money is the opportunity cost, which is represented by the rate of interest (the return one could earn by lending the money or investing it, instead of holding it). 3. According to the theory of liquidity preference or the demand and supply framework for money, the rate of interest is determined by the interaction of the demand for money and the supply of money. 4. If the supply of money is fixed and the demand for money increases (people want to hold more money, perhaps due to increased transactions, precautionary motives, or speculative motives), there will be excess demand for money at the existing rate of interest. 5. To equilibrate the money market, the price of holding money – the rate of interest – must rise. An increase in the rate of interest makes holding money more expensive (higher opportunity cost), thus discouraging people from holding as much money and bringing the quantity demanded back into balance with the fixed supply. 6. Therefore, when the demand for money increases with the supply remaining the same, there will be an increase in the rate of interest. 7. Changes in prices (A) or income and employment (D) are secondary effects; the immediate effect in the money market is on the rate of interest.