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CA Foundation · Business Economics · Money Market

Which of the following changes would shift the money demand curve to the right at every interest rate, thereby raising the equilibrium interest rate if money supply is fixed?

A rise in the price level and nominal income increases the amount of money needed for transactions, shifting money demand right at every interest rate. With money supply fixed, this pushes the equilibrium interest rate up. The other options reduce demand or change supply.

  1. AA rise in the general price level and nominal income, raising transaction needsCorrect
  2. BA fall in nominal income of households
  3. CA fall in the price level of goods and services
  4. DAn increase in the money supply by the central bank

Explanation

Transaction demand for money rises with nominal income and the price level, so a rise in these shifts the money demand curve right. With a fixed supply, the equilibrium rate then rises. A fall in income or prices shifts demand left, and a supply increase shifts the supply curve, not demand.

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