The reason why individuals have more money demand when their inflation expectations increase is because:
A) they need to find another job when prices go up so that they could buy the same goods and services.
B) they need more money in their pockets when prices go up so that they could buy the same goods and services.
C) they need a higher wage when prices go up so that they could buy the same goods and services.
D) they need less money in their pockets when prices go up so that they could buy the same goods and services.

Question

Quizplus · Accepted Answer

When individuals' inflation expectations increase, they believe that prices will be higher in the future. This means that they will need more money to be able to buy the same goods and services as before, hence increasing their money demand. Option A is incorrect because finding another job is not a direct solution to inflation. Option C is incorrect because a higher wage may not necessarily lead to an increase in the individual's purchasing power. Option D is incorrect because needing less money in their pockets when prices go up would mean that individuals' consumption levels have decreased, which is opposite of what is expected during inflation.

The Reason Why Individuals Have More Money Demand When Their