Question

Which of the following will cause the money demand curve to shift right from MD1 to...

Which of the following will cause the money demand curve to shift right from MD1 to MD2?

A) real GDP decreased

B) the price level increased

C) the interest rate decreased

D) the Federal Reserve sold Treasury securities

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Answer #1

The rightward shift of the money demand curve indicates an increase in the demand for money.

In general, when price level rises then purchasing power of money decreases. This decrease in purchasing power of money compels people to hold more money so that same standard of living can be maintained.

So, people will demand more money.

Thus, the increase in price level will cause the money demand curve to shift right from MD1 to MD2.

Hence, the correct answer is the option (B).

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