Question

Which of the following expressions can be a general demand for (real) money (balances) function, L(i, Y)?

	A.	Y / i.
	B.	Y + i.
	C.	Y * i .
	D.	none of the above.

Answer 1

Generally, Demand for Real money balances depend on interest rate (i) and Income(Y).

Demand for Real Money Balance is Positively Realted to Income(Y). It means that as Y Increases, Demand for Real Money Balances Increases and vice versa.

Demand for Real Money Balance is Negatively Related to the Interest Rate (i). This means that as Interest Rate Increases, Demand for Real Money Balance Decreases and vice versa.

Thus, the expression which can be General demand for Real money Balance Function satisfying above two conditions is:

L(i,Y)= Y/i

According to the above given condition, demand for Real Money Balance Increases as Y Increases and Decreases as i Increases.

Hence, Option A is correct.