The effect on the level of income of a given increase in the money stock is
A)irrelevant to the interest elasticity of money demand.
B)greater the lower the interest elasticity of money demand.
C)greater the higher the interest elasticity of money demand.
D)None of the above

Question

Quizplus · Accepted Answer

The effect of an increase in the money stock on the level of income is determined by the interest elasticity of money demand. If the demand for money is highly interest inelastic, then an increase in the money stock will have a greater effect on the level of income, as individuals are less likely to hold onto the additional money and instead spend it. On the other hand, if the demand for money is highly interest elastic, then an increase in the money stock will have a smaller effect on the level of income, as individuals will prefer to hold onto the money and save it rather than spend it. Therefore, the level of income will increase to a greater extent when money demand is inelastic, and to a lesser extent when it is elastic.

The Effect on the Level of Income of a Given