A lower level of income causes the demand for money to ________ and the interest rate to ________.
A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase

Question

Quizplus · Accepted Answer

When there is a lower level of income, people tend to reduce their spending and therefore their demand for money decreases. However, with a lower demand for money, there is a surplus of money in the economy, and lenders compete with each other for borrowers by lowering their interest rates. As a result, the interest rate decreases.

A Lower Level of Income Causes the Demand for Money