IAI Actuarial Core Principles · Business Economics · Role of money and interest rates in the economy
Which change would shift the transactions demand for money of Indian households to the right at every interest rate, other things equal?
A rise in nominal incomes and the price level shifts transactions money demand right, because more or costlier transactions need larger balances. Interest rate changes only move along the curve, and payment technology like UPI tends to reduce demand.
- AA rise in the interest rate on fixed deposits
- BA wider adoption of UPI that lets people settle payments instantly and cheaply
- CA rise in nominal incomes and in the general price levelCorrect
- DAn expectation that bond prices will rise
- A fall in the central bank's money supply
Explanation
Transactions demand depends on nominal income and prices: more or costlier transactions require more money balances. A rise in the interest rate is a movement along the curve, not a shift. Payment innovations like UPI reduce the cash needed, shifting demand left. Expected bond price rises reduce speculative demand, and money supply changes shift the supply curve.
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