Suppose that a sharp downturn in the price of a country's prime manufacturing product results in a terrible recession and a massive decline in the general income level of the citizens.Other things constant, what would be the recession's most probable effect on money demand in the country?
A)People will hold more money for any purpose, resulting in a decline in money demand.
B)Local M1 money demand will rise.
C)The transactions demand for money will fall such that the quantity of money demanded will be lower at any given interest rate level.
D)The speculative demand for money will fall, causing a downward movement along the money demand curve.
E)The precautionary demand for money will increase, causing an upward shift in the money demand curve.

Question

Quizplus · Accepted Answer

When the general income level of citizens declines, the transactions demand for money falls as they have less money to spend on goods and services, resulting in a decreased level of money demand. Other demand factors such as speculative demand and precautionary demand may also be affected, but the transactions demand is the one most affected by the recession.

Suppose That a Sharp Downturn in the Price of a Country's