In the money market, money supply is determined by the central bank, such as the

ID: 1251197 • Letter: I

Question

In the money market, money supply is determined by the central bank, such as the Fed in the U.S. Because of this, money supply curve is usually vertical in the short run, while the money demand curve is downward sloping. The quantity demanded of money has an inverse relationship with the interest rate, but a direct relationship with both the price level and real GDP. Therefore, when the general price level increases, what will most likely happen?

A. The money demand curve will shift to the right.

B. The money demand curve will shift to the left.

C. Both the interest rate and investment will rise.

D. Only A and C.

E. Only B and C.

Explanation / Answer

A is correct. Demand increases are associated with price level increases. B is incorrect. Increases in demand are associated with price level increases. C is incorrect. Investment is inversely related to interest rates.

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In the money market, money supply is determined by the central bank, such as the

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In the money market, money supply is determined by the central bank, such as the

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