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Question
Microeconomics
Posted 4 months ago
If there is an increase in aggregate demand, what happens in the mone market?
Choose 1 answer:
(A) The market for money is unaffected.
(B) The demand for money decreases and nominal interest rates decrease.
(C) The demand for money increases and nominal interest rates increase.
(D) The supply of money increases and nominal interest rates decrease.
(E) The supply of money decreases and nominal interest rates increase.
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Answer from Sia
Posted 4 months ago
Solution
a
Increase in Aggregate Demand: When aggregate demand increases, it typically leads to higher overall spending in the economy. This increased spending raises the demand for money as consumers and businesses need more money to facilitate their transactions
b
Demand for Money: As the demand for money increases, the demand curve for money shifts to the right. This shift indicates that at any given interest rate, the quantity of money demanded is higher
c
Nominal Interest Rates: With a higher demand for money and a fixed money supply, the equilibrium interest rate in the money market will rise. This is because people are willing to pay more to hold money, driving up the nominal interest rates
Answer
C. The demand for money increases and nominal interest rates increase.
Key Concept
Relationship between Aggregate Demand and Money Market
Explanation
An increase in aggregate demand leads to higher spending, which increases the demand for money. With a fixed money supply, this higher demand for money results in higher nominal interest rates.
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