When nominal money supply is held constant and the price level increases, then
A)real money balances increase and real interest rates decrease
B)real money balances decrease and real interest rates increase
C)real money balances decrease and real interest rates remain the same
D)the AS-curve must have shifted to the right
E)both B and D

Question

Quizplus · Accepted Answer

The nominal money supply is held constant, meaning the quantity of money in the economy remains unchanged. As the price level increases, the value of each unit of currency decreases, reducing real money balances for individuals and firms. Real interest rates would then increase, as borrowers demand more compensation for the decrease in purchasing power of each dollar borrowed. Therefore, choice B is correct. Choice D is incorrect, as there is no information given about any shift in the AS-curve.

When Nominal Money Supply Is Held Constant and the Price