When the price level rises, the demand for money ________ and, as a result, the equilibrium nominal interest rate ________.
A) rises; decreases
B) rises; increases
C) falls; decreases
D) falls; increases
E) rises; probably changes but more information is needed to determine if it rises or falls.

Question

Quizplus · Accepted Answer

When the price level rises, the demand for money increases because people need more money to purchase goods and services, which reduces the purchasing power of each dollar they hold. To restore their desired level of money holdings, they will demand higher interest rates, which will increase the equilibrium nominal interest rate. Therefore, as the price level rises, the nominal interest rate also rises.

When the Price Level Rises, the Demand for Money ________