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If the demand for money decreases as a result of a(n) ________ in nominal GDP, the...

If the demand for money decreases as a result of a(n) ________ in nominal GDP, the interest rate will _______. Select one: a. increase; increase b. decrease; increase c. decrease; decrease d. increase; decrease

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Answer #1

Demand for money decreases when income(or nominal GDP) decreases because when income decreases people will prefer to hold lesser money and thus they will demand less money and thus money demand curve(with interest rate on vertical axis and quantity of money on horizontal axis) will shift to the left.

Equilibrium occurs when money demand = money supply. This leftward shift in Money demand will result in decrease in interest rate(as new money demand and money supply curve will intersect at lower amount of interest rate).

So, interest rate will decrease.

Hence, the correct answer is (c) decrease; decrease

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