If real income rises 4%,prices rise 1%,and nominal money demand rises 4%,what is the income elasticity of real money demand?

Question

Quizplus · Accepted Answer

The income elasticity of real money demand can be calculated as:
%Δ(real money demand) / %Δ(real income)

%Δ(real income) = 4%
%Δ(prices) = 1%
So, %Δ(real money demand) = %Δ(nominal money demand) - %Δ(prices) = 4% - 1% = 3%

Therefore, the income elasticity of real money demand is:
%Δ(real money demand) / %Δ(real income) = 3% / 4% = 0.75 or 3/4. So, the answer is A.

If Real Income Rises 4%,prices Rise 1%,and Nominal Money Demand