An increase in real GDP affects the demand for money because
A) tax payments rise because more income is earned.
B) there is an inverse relationship between the quantity of money demanded and nominal GDP.
C) the larger real GDP, the higher the real interest rate.
D) at the higher price level, it takes more dollars to make expenditures.
E) when real GDP increases, more money is needed to make expenditures.

Question

Quizplus · Accepted Answer

An increase in real GDP means that the economy is producing and likely consuming more goods and services. This increase in economic activity requires more transactions, which in turn means that more money is needed to facilitate these transactions. Hence, when real GDP increases, the demand for money increases because more money is needed to make expenditures.

An Increase in Real GDP Affects the Demand for Money