The relationship between the quantity of real balances demanded and the rate of interest (called the demand for money curve) will ____ when GDP increases because _____.
A) increase (shift right); more transactions balances are needed to make purchases and to hold between pay periods
B) increase (shift right); more asset balances are needed for saving or precautionary reasons
C) decrease (shift left); fewer transactions balances are needed to make purchases and to hold between pay periods
D) decrease (shift left); lower asset balances are needed for saving or precautionary reasons

Question

Quizplus · Accepted Answer

When GDP increases, there are more transactions taking place in the economy. This means that people need more money to make purchases and to hold between pay periods, leading to an increase in the quantity of real balances demanded. Therefore, the demand for money curve will shift right.

The Relationship Between the Quantity of Real Balances Demanded and the Rate