A decline in the output gap causes the demand for real balances
A) to rise and the interest rate to fall.
B) to fall and the interest rate to rise.
C) and the interest rate to fall.
D) and the interest rate to rise.

Question

Quizplus · Accepted Answer

A decline in the output gap means that the economy is producing less than its potential. This will lead to a decrease in the demand for goods and services, which will in turn lead to a decrease in the demand for money. As a result, the interest rate will fall.

A Decline in the Output Gap Causes the Demand for Real