ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Increase
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Will roughly fall in line with the change in interest rates
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Will remain unchanged
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Could move in either direction depending on other factors
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Detailed explanation-1: -35:-As the level of interest rates in the economy falls, the demand for money, ceteris paribus: Will remain unchanged.
Detailed explanation-2: -An increase (decrease) in the money supply, ceteris paribus, will cause a decrease (increase) in average interest rates in an economy.
Detailed explanation-3: -You can see that there is an inverse relationship-when the Central Bank increases Money Supply (Ms), the MS/P line (Real Money Supply) shifts to the right along the L function (liquidity as a function of volume and interest rate), thereby decreasing the interest rate.
Detailed explanation-4: -Money demand increases because, at the higher level of income, people want to hold more money to support the increased spending on transactions.
Detailed explanation-5: -Figure 25.8 “An Increase in Money Demand” shows an increase in the demand for money. Such an increase could result from a higher real GDP, a higher price level, a change in expectations, an increase in transfer costs, or a change in preferences.