If the demand for money depends on the interest rate, then a 15% increase in the money supply will increase
A) nominal GDP by 15%.
B) nominal GDP by less than 15%.
C) nominal GDP by more than 30%.
D) real GDP by 30%.

Question

Quizplus · Accepted Answer

The increase in the money supply will initially lower the interest rate, which in turn will increase the demand for money. However, the increase in nominal GDP will be less than 15% because the economy may not be able to immediately adjust to the increase in the money supply. Therefore, option B is correct. Option A and C are incorrect because the increase in the money supply will not lead to a proportional increase in nominal GDP. Option D is incorrect because real GDP is determined by factors such as technology, labor, and capital, and is not directly affected by changes in the money supply.

If the Demand for Money Depends on the Interest Rate