FIGURE 27-1 Refer to Figure 27-1.Given the money demand curve,M_D,an increase in the quantity of money demanded from M₁ to M₀ can be caused by

Question

Quizplus · Accepted Answer

According to the quantity theory of money, an increase in the quantity of money in circulation leads to a proportional increase in the price level. Thus, option A is incorrect. A decrease in the price level would result in a decrease in the quantity of money demanded (with the money demand curve held constant), making option B incorrect. Option C is incorrect because an increase in real GDP, with the money demand curve held constant, would not affect the quantity of money demanded. An increase in the rate of interest would lead to a decrease in the quantity of money demanded (with the money demand curve held constant), making option D incorrect. Therefore, the only option that remains is E, which states that a decrease in the rate of interest would increase the quantity of money demanded (with the money demand curve held constant), making it the correct answer.