Based on the model of the money market, when real income decreases, the equilibrium interest rate should
A) stay the same.
B) increase.
C) decrease.
D) increase to the same extent that the supply of money increases.

Question

Quizplus · Accepted Answer

According to the model of the money market, a decrease in real income leads to a decrease in the demand for money since people will have less disposable income to spend. As a result, the demand curve for money shifts to the left. To maintain equilibrium, the interest rate must decrease so that the quantity of money demanded equals the quantity supplied. Thus, the correct answer is C- the equilibrium interest rate decreases when real income decreases.

Based on the Model of the Money Market, When Real