Question

According to the monetary model, what happens when there is a fall in real income?

Answer 1

when there is a fall in the real income, it will mean that there would have been a fall in the nominal income ,as well as there is a fall in the inflation in the economy so it can be said that the economy is not in a good state because the demand for the goods has gone down and monetary model will state that there is a a lower money supply in the economy, and it can be reflected through lower inflation, lower demand, and lower real interest rate.

In such scenario when there is a lower interest rate and lower demand there is a need for stimuy of demand by the central banks and they will often do it by providing various packages to stimulate the demand and stimulate the inflation in order to to inflate overall nominal interest rate and accordingly real interest rate in the economy