With a fixed supply of money, as GDP rises, the demand for money ____ and therefore ____ must rise to encourage savers to hold financial assets instead of cash.
A) falls; prices
B) rises; incomes
C) rises; rates of interest
D) falls; taxes

Question

Quizplus · Accepted Answer

As GDP rises, the demand for money rises. This is because there is an increased demand for financial assets, such as stocks and bonds, due to businesses and individuals having more money to invest. To encourage savers to hold financial assets instead of cash, the rates of interest must rise. This will make holding financial assets more attractive, thereby decreasing the demand for money.

With a Fixed Supply of Money, as GDP Rises, the Demand