If the interest elasticity of money demand is -0.1,by what percent does money demand change if the nominal interest rate rises from 2% to 3%?

Question

Quizplus · Accepted Answer

The formula for interest elasticity of money demand is:
% change in money demand = (interest elasticity) x (% change in interest rate)
Given:
Interest elasticity = -0.1
% change in interest rate = (3-2)/2 = 0.5 = 50%
Therefore, % change in money demand = (-0.1) x (50%) = -5%
Hence, money demand decreases by 5% if the nominal interest rate rises from 2% to 3%. The correct answer is D.

If the Interest Elasticity of Money Demand Is -0