If the income elasticity of money demand is 3/4 and income increases 8%,by about how much does the price level change?

Question

Quizplus · Accepted Answer

If the income elasticity of money demand is 3/4, then a 1% increase in income leads to a 0.75% increase in money demand. An 8% increase in income would increase money demand by 6% (0.75 * 8%). If the money supply is unchanged, the price level must fall by 6% to maintain equilibrium.

If the Income Elasticity of Money Demand Is 3/4 and Income