Question

Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances.
A. positively; negativelyB. negatively; negativelyC. positively; positivelyD. negatively; positively

Answer 1

Answer:

The correct answer is option D.

Explanation:

The income and interest rates are inversely or negatively related in the goods market.

An increase in interest rate would lead to increase in the cost of borrowing.As a result the capital investment will fall. This would further contribute in a decline in the production. This ultimately causes income level  to decline.

In the money market though equilibrium levels of income and interest rate are positively related.

The equilibrium in the money market is determined by the intersection of demand for money curve and supply of money curve.

The demand for money depends on transactionary and precautionary motives. When there is an increase in income, the transactionary demand for money will increase as people will spend more. The increase in demand would cause the interest rate to rise.

In this way, income and interest rate arepositively related in the money market.