Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances.
A) positively; positively
B) positively; negatively
C) negatively; negatively
D) negatively; positively

Question

Quizplus · Accepted Answer

In the goods and services market, higher levels of income lead to an increase in demand for goods and services, which in turn leads to an increase in the demand for money. As a result, the demand for money exceeds the supply of money, creating an excess demand for money. To eliminate this excess demand for money, interest rates must rise, so equilibrium levels of income and interest rates are negatively related in the goods and services market.

In the market for real money balances, higher levels of income lead to an increase in the demand for money. As a result, the demand for money exceeds the supply of money, creating an excess demand for money. To eliminate this excess demand for money, interest rates must rise, so equilibrium levels of income and interest rates are positively related in the market for real money balances.

Equilibrium Levels of Income and Interest Rates Are ______ Related