Which of the following statements is correct? Other things being equal:
A)a decline in real output will shift both the transactions demand curve for money and the total money demand curve to the right.
B)a decline in the interest rate will shift the asset demand curve for money to the right, but leave the total money demand curve unchanged.
C)deflation will shift both the transactions demand curve for money and the total money demand curve to the left.
D)inflation will shift the transactions demand curve for money to the right, but leave the total money demand curve unchanged.

Question

Quizplus · Accepted Answer

Deflation, which means a decrease in the general price level, reduces the need for cash because individuals need less money to purchase goods and services. Therefore, deflation shifts both the transactions demand curve and the total money demand curve to the left. Option A is incorrect because a decline in output would reduce the transactions demand curve but could increase other demands for money, leaving the effect on the total money demand curve ambiguous. Option B is incorrect because a decrease in interest rates would increase the demand for money, but only for asset purposes, while the total demand for money would remain unchanged. Option D is incorrect because inflation tends to increase the demand for money as individuals need more money to purchase goods and services, but it may not shift the total demand curve if individuals anticipate future inflation and increase their holdings of money.

Which of the Following Statements Is Correct? Other Things Being