An increase in money demand causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.
A)rise;rise
B)rise;fall
C)fall;rise
D)fall;fall

Question

Quizplus · Accepted Answer

An increase in money demand causes a decrease in the money supply, which leads to an increase in the nominal interest rate. However, in the short run, prices do not adjust immediately, so the increase in the nominal interest rate leads to a decrease in investment and consumption spending, which leads to a decrease in output. Therefore, the correct answer is B, which indicates that the real interest rate rises and output falls.

An Increase in Money Demand Causes the Real Interest Rate