If real income rises 5%,prices rise 3%,and nominal money demand rises 7%,what is the income elasticity of real money demand?

Question

Quizplus · Accepted Answer

The income elasticity of real money demand is calculated as the percentage change in real money demand divided by the percentage change in real income. Real money demand changes due to changes in nominal money demand adjusted for the change in prices. Here, nominal money demand rises by 7%, and prices rise by 3%, so the real money demand rises by approximately 4% (7% - 3%). Real income rises by 5%. Therefore, the income elasticity of real money demand is 4%/5% = 4/5.

If Real Income Rises 5%,prices Rise 3%,and Nominal Money Demand