If the demand for real money balances is proportional to real income, velocity will:
A) increase as income increases.
B) increase as income decreases.
C) vary directly with the interest rate.
D) remain constant.

Question

Quizplus · Accepted Answer

If the demand for real money balances is proportional to real income, it means that as real income increases, the demand for real money balances increases at the same rate, keeping the velocity of money (the rate at which money circulates in the economy) constant. Velocity is defined as the ratio of nominal GDP to the money supply, and if both the numerator (nominal GDP, which reflects real income) and the denominator (money supply, which reflects real money balances) increase proportionally, the velocity remains unchanged.

If the Demand for Real Money Balances Is Proportional to Real