Suppose that the supply of money were fixed and GDP rose. To maintain the equality of supply and demand in the money market,
A) interest rates would have to fall if prices are to be held stable.
B) the price level would have to rise if interest rates are to be held constant.
C) interest rates would have to rise if prices are to be held stable.
D) nothing else would have to happen.
E) prices and interest rates would both have to fall.

Question

Quizplus · Accepted Answer

If the supply of money is fixed and GDP rises, the demand for money (to facilitate the increased number of transactions in the economy) would increase. To maintain the equality of supply and demand in the money market with stable prices, interest rates would have to rise to balance the increased demand for a fixed supply of money. Higher interest rates would temper the demand for money, bringing it back in line with the fixed supply.

Suppose That the Supply of Money Were Fixed and GDP