Hamsterville's national income increased due to an increase in government spending.

How does an increase in national income affect the money market and interest rates?

Choose 1 answer:

A Demand for money increases; interest rates increase
(B) Demand for money increases; interest rates decrease
(C) There is no impact on the money market; interest rates decrease
(D) Supply of money increases; interest rates decreases
(E) Supply of money increases; interest rates increases

Question

Hamsterville's national income increased due to an increase in government spending.

How does an increase in national income affect the money market and interest rates?

Choose 1 answer:

A Demand for money increases; interest rates increase
(B) Demand for money increases; interest rates decrease
(C) There is no impact on the money market; interest rates decrease
(D) Supply of money increases; interest rates decreases
(E) Supply of money increases; interest rates increases

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ An increase in national income typically leads to an increase in the demand for money because people have more income to spend and save. ‖ ‖ step 2 ⋮ When the demand for money increases, the interest rates tend to rise if the money supply remains constant. This is because people are willing to pay more to borrow money. ‖ ‖ step 3 ⋮ Therefore, the correct answer is that the demand for money increases and interest rates increase. ‖ ***A*** ∻Key Concept∻ ⚹Relationship between national income, money demand, and interest rates⚹ ∻Explanation∻ ⚹An increase in national income increases the demand for money, which in turn raises interest rates if the money supply is unchanged.⚹◊What relationship exists between an increase in national income and the demand for money in the money market?⍭ Generate me a similar question◊

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