If the money supply is held constant, then an increase in the nominal interest rate will ______ the demand for money and ______ the price level.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question

Quizplus · Accepted Answer

An increase in the nominal interest rate makes holding money more expensive, which decreases the demand for money. Holding the money supply constant means that the supply of money does not change, which can lead to an excess supply of money in the economy. This excess supply of money can lead to a decrease in the price level as individuals and businesses try to spend their excess money balances by purchasing goods and services. Therefore, an increase in the nominal interest rate will decrease the demand for money and increase the price level, making choice C the best answer.

If the Money Supply Is Held Constant, Then an Increase