Ceteris paribus, if the price level increases by 20 percent,

Question

Quizplus · Accepted Answer

Ceteris paribus, if the price level increases by 20 percent, individuals will require more money to make the same transactions as before, leading to an increase in the nominal demand for money by 20 percent. However, the demand for real balances (the demand for money relative to the price level) remains the same as individuals still require the same amount of real purchasing power to make transactions. Therefore, the demand for real balances does not change, and option C is the best choice.

Ceteris Paribus, If the Price Level Increases by 20 Percent