Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increased income raises the demand for money, leading to higher nominal interest rates.
B
Increased income decreases the supply of loanable funds, causing nominal interest rates to fall.
C
Increased income leads to a decrease in the demand for money, lowering nominal interest rates.
D
Increased income has no effect on the nominal interest rates.
Understanding the Answer
Let's break down why this is correct
Answer
When household income increases, people tend to spend more money and also save more. This increase in savings leads to a higher demand for money because households want to hold onto more cash for purchases and savings. In the short run, as demand for money rises, the nominal interest rate may also increase because banks may charge more to lend money when they see more people wanting to borrow. For example, if families start earning more and want to buy new cars or homes, they will seek loans, pushing up interest rates. Therefore, the increase in household income can lead to higher nominal interest rates in the money market in the short run.
Detailed Explanation
When people earn more money, they want to hold more cash for spending. Other options are incorrect because This answer suggests that more income means less money available to lend; This option says that more income lowers the need for money.
Key Concepts
Money Demand
Interest Rates
Loanable Funds
Topic
Money Demand and Supply Effects
Difficulty
medium level question
Cognitive Level
understand
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