Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
An increase in income leads to a higher demand for money.
B
Higher income reduces the supply of loanable funds available.
C
Increased household savings as a result of higher income lowers real interest rates.
D
An increase in income typically results in higher nominal interest rates.
E
Higher income has no effect on the demand for money.
Understanding the Answer
Let's break down why this is correct
Answer
When income increases, people generally want to hold more money because they are buying more goods and services. This means that the demand for money goes up; people need more cash for their transactions. On the other hand, the supply of money is controlled by the central bank and does not change directly with income. However, if the central bank sees that people need more money, it might decide to increase the money supply to meet this demand. For example, if a community gets a raise and starts spending more at local shops, the demand for money will rise as they need more cash to pay for their purchases.
Detailed Explanation
When income increases, people usually want to hold more money for spending. Other options are incorrect because This option suggests that more income does not lead to wanting more money; This option implies that more income means less money available for loans.
Key Concepts
Money Demand
Loanable Funds
Interest Rates
Topic
Money Demand and Supply Effects
Difficulty
easy level question
Cognitive Level
understand
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