When the money market is depicted in a diagram with the value of money on the vertical axis,what would shift money demand to the right?
A) an increase in the price level
B) a decrease in the price level
C) a decrease in real GDP
D) an increase in real GDP

Question

Quizplus · Accepted Answer

When real GDP increases, people have more money to spend, therefore, they demand more money. This shifts the demand for money to the right. Additionally, an increase in income leads to an increase in consumption which increases aggregate demand, thus increasing the demand for money as well. On the other hand, an increase in the price level (choice A) would decrease the demand for real money balances due to the loss of purchasing power, while a decrease in the price level (choice B) would increase the demand for money just as an increase in real GDP would (choice D). A decrease in real GDP (choice C) would decrease the demand for money, as consumers have less to spend.

When the Money Market Is Depicted in a Diagram with the Value