The figure given below shows the interest rate on the vertical axis and the quantity of money on the horizontal axis.In this figure,a decrease in nominal GDP with no change in the price level will cause a movement from:

A)point B to point A.
B)point A to point B.
C)DM to DM'.
D)DM to DM*.
E)point E to point F.

Question

The figure given below shows the interest rate on the vertical axis and the quantity of money on the horizontal axis.In this figure,a decrease in nominal GDP with no change in the price level will cause a movement from:

A)point B to point A. 
B)point A to point B. 
C)DM to DM'. 
D)DM to DM*. 
E)point E to point F.

Quizplus · Accepted Answer

A decrease in nominal GDP with no change in the price level will cause a decrease in the demand for money. This will shift the demand curve for money to the left from DM to DM*. As a result, the interest rate will decrease from i₁ to i₂ and the quantity of money will decrease from M₁ to M₂. Therefore, the movement will be from point DM to point DM*.

The Figure Given Below Shows the Interest Rate on the Vertical