Question

# 1. Which of the following will definitely increase nominal money demand? a. decreasing interest rate and...

1. Which of the following will definitely increase nominal money demand?

a. decreasing interest rate and decreasing nominal GDP

b. increased nominal GDP and reduced inflation

c. rising interest rates and consumers decide to carry less cash than before

e. increasing inflation and increasing real GDP

2. AN increase in the price level will...?

a. increase the nominal money supply

b. increase money demand

c. decrease money demand

1.

Ans is e). Increasing inflation and increasing real GDP

Explanation:

An increase in real GDP increases the volume of expenditure increases the real demand for money, An increase in the price level (inflation) increases the nominal demand for money.

2. AN increase in the price level will increase money demand.

Ans is b)

Explanation:

As the price level increases, people need more money to buy the same good so the demand for money increases.

Mathematically,

The equation for the demand for money is: Md = P * L(R,Y).

Md is positively related to P, so when P rises, money demand also rises