The demand for real money balances is a function of:
A) the supply of real money balances.
B) the nominal GDP.
C) the nominal rate of interest on alternative assets and the level of real GDP.
D) policy decisions by the central bank.

Question

Quizplus · Accepted Answer

The demand for real money balances is influenced by both the nominal rate of interest on alternative assets and the level of real GDP. When interest rates on alternative assets are high, the demand for real money balances decreases, as people choose to hold less money and invest more in those alternative assets. Similarly, as the level of real GDP increases, the demand for money also increases, as people engage in more transactions that require money. The supply of real money balances and policy decisions by the central bank may also affect the money market, but they are not the primary determinants of the demand for real money balances.

The Demand for Real Money Balances Is a Function Of