An increase in real income _____ the demand for real money balances and thereby causes a ____ in the nominal rate of interest.
A) lowers; rise
B) lowers; fall
C) raises; rise
D) raises; fall

Question

Quizplus · Accepted Answer

An increase in real income raises the demand for real money balances as individuals and businesses have more income to spend and invest, leading to an increase in the demand for transactions. This increased demand for money can lead to a rise in the nominal rate of interest as the supply of money is relatively fixed in the short term, and higher demand leads to higher prices for borrowing money.

An Increase in Real Income _____ the Demand for Real