A 5% increase in real income usually leads to ________ in money demand.

Question

Quizplus · Accepted Answer

According to the theory of money demand, an increase in income leads to an increase in the demand for money. However, it is believed that the increase in money demand is less than the increase in real income, because as income rises, people tend to hold a smaller proportion of their wealth in liquid form (money). Therefore, a 5% increase in real income usually leads to an increase in money demand of less than 5%.

A 5% Increase in Real Income Usually Leads to ________