Figure 21-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. -Refer to Figure 21-2. Assume the money market is always in equilibrium, and suppose r₁ = 0.08; r₂ = 0.12; Y₁ = 13,000; Y₂ = 10,000; P₁ = 1.0; and P₂ = 1.2. Which of the following statements is correct? When P = P₂, A)investment is lower than it is when P = P₁. B)nominal output is higher than it is when P = P_1. C)the expected rate of inflation is higher than it is when P = P₁. D)the velocity of money is higher than it is when P = P₁.

Question

Quizplus · Accepted Answer

When the price level increases from P1 to P2, the real interest rate increases, leading to lower investment.