If money demand decreases due to greater use of credit cards,which of the following would most likely happen under a neutralization policy?
A) The money supply would decrease,real GDP would not change,and neither would the interest rate.
B) The money supply would increase,real GDP would not change,and neither would the interest rate.
C) The money supply would decrease,real GDP would increase,and the interest rate would decrease.
D) The money supply would increase,real GDP would not change,and the interest rate would decrease.
E) The money supply would decrease,real GDP would decrease,but the interest rate would not change.

Question

Quizplus · Accepted Answer

If money demand decreases due to greater use of credit cards, a neutralization policy would aim to keep the money supply constant. Therefore, under a neutralization policy, the decrease in money demand would lead to a decrease in the money supply to counteract the initial decrease in money demand. However, real GDP and interest rates should not be affected by the policy, as the decrease in money demand should be offset by the decrease in the money supply. Therefore, the correct choice is A.

If Money Demand Decreases Due to Greater Use of Credit