If real GDP decreases, the demand for money curve will shift
A) leftward and the interest rate will fall.
B) rightward and the interest rate will rise.
C) rightward and the interest rate will fall.
D) leftward and the interest rate will rise.

Question

Quizplus · Accepted Answer

When real GDP decreases, there is less economic activity and therefore less demand for money. This will cause the demand for money curve to shift leftward. According to the liquidity preference theory of interest rates, a decrease in the demand for money will lead to a decrease in the interest rate. Therefore, the interest rate will fall.

If Real GDP Decreases, the Demand for Money Curve Will