The quantity of real balances demanded varies ____ with the nominal rate of interest because ________.
A) directly; at higher interest rates people want more money
B) inversely; at lower interest rates people want less money
C) inversely; when people hold more money, they forego interest on other assets
D) directly; real balances are independent of inflation and would not be affected by it

Question

Quizplus · Accepted Answer

The quantity of real balances demanded varies inversely with the nominal rate of interest because when people hold more money, they forego interest on other assets. In other words, when the nominal rate of interest is high, people would prefer to hold fewer real balances and invest in other assets to earn more interest. Therefore, the demand for real balances is higher when the nominal rate of interest is low.

The Quantity of Real Balances Demanded Varies ____ with the Nominal