During a recession,

Question

During a recession,

Quizplus · Accepted Answer

During a recession, the interest rate tends to fall as a result of the decrease in demand for credit, which leads to an increase in demand for money (the opposite of what happens during an expansion). This fall in interest rate tends to cause money demand to rise. However, the decrease in real GDP also tends to cause money demand to fall, which partly offsets the impact of the fall in interest rates. Therefore, the overall effect is that money demand may still rise, but not as much as it would if real GDP were not falling.

During a Recession