In the long run, the demand for real balances rises whenever:
A) nominal interest rates fall.
B) real GDP rises.
C) the exchange rate rises.
D) nominal interest rates fall and real GDP rises.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the demand for real balances (or real money balances) is directly proportional to the level of real GDP. As the economy grows and real GDP rises, people need more money to carry out their transactions. This increases the demand for real balances. Nominal interest rates and exchange rates do not have a direct impact on the demand for real balances.

In the Long Run, the Demand for Real Balances Rises