An increase in the money growth rate in the market clearing model causes:

Question

Quizplus · Accepted Answer

An increase in the money growth rate leads to an increase in the supply of money in the market. This, in turn, leads to a decrease in the nominal interest rate (choice A), as borrowers can now access more funds at lower interest rates, and lenders have more money to lend. Additionally, the increase in the money supply causes an increase in aggregate demand, which leads to an increase in prices and hence, inflation (choice C). Finally, as nominal interest rates decrease, individuals and firms may hold less money in savings and more in other assets, leading to a decrease in money demand (choice B). Therefore, all of the above choices are correct.

An Increase in the Money Growth Rate in the Market