Correct Option
When the supply of money remains constant and there is an increase in the demand for money, money becomes relatively scarcer in the economy. The interest rate represents the 'price' of money. According to basic economic principles and the liquidity preference theory, an increased demand for a fixed supply of any asset, including money, leads to an increase in its price. Therefore, an increase in the demand for money, with an unchanged supply, exerts upward pressure on the interest rate.
Incorrect Options
Option (a): A fall in the level of prices is generally associated with a decrease in aggregate demand, an increase in aggregate supply of goods and services, or a reduction in the money supply itself. An increase in money demand with constant supply primarily impacts interest rates, not directly leading to a fall in the general price level.
Option (c): A decrease in the rate of interest would occur if the supply of money increased relative to its demand, or if the demand for money decreased while its supply remained constant. The given scenario describes the opposite condition, where increased demand with constant supply would lead to higher interest rates.
Option (d): An increase in the rate of interest typically discourages investment and consumption spending, as borrowing becomes more expensive. This reduction in aggregate demand can lead to a decrease in the level of income and employment in the economy, rather than an increase. Therefore, an increase in income and employment is not a direct consequence of increased money demand with constant supply.