In the case where money demand is completely interest insensitive (interest elasticity equals zero),an increase in the quantity of money will
A)increase income but leave the interest rate unchanged.
B)increase income and lower the interest rate.
C)lower the interest rate but leave income unchanged.
D)leave both income and the interest rate unchanged.

Question

Quizplus · Accepted Answer

A completely interest-insensitive demand for money means that individuals will hold the same amount of money, regardless of the interest rate. Thus, an increase in the quantity of money will not affect money demand, but it will increase aggregate demand, leading to an increase in income. However, since the interest rate is determined by the supply and demand for money, an increase in the quantity of money will increase the supply of money, which will lower the interest rate. Therefore, the correct answer is B.

In the Case Where Money Demand Is Completely Interest Insensitive