The Keynesian demand for real balances can be expressed as A)M^d = f(i,Y). B)M^d/P = f(i). C)M^d/P = f(Y). D)M^d/P = f(i,Y).

Question

Quizplus · Accepted Answer

The demand for real balances can be expressed as a function of both interest rates and income (Y), so option D which includes both variables is the most appropriate choice. The formula M^d/P represents real balances (S) in terms of money supply (M), velocity of money (U), price level (P), and nominal balances (d), all of which are constant. Therefore, the only variables that can affect the demand for real balances are interest rates and income levels.

The Keynesian Demand for Real Balances Can Be Expressed as