Question

As real GDP falls: a. money demand rises, so the interest rate rises. b. money demand rises, so the interest rate falls c. money demand falls, so the interest rate rises. d. money demand falls, so the interest rate falls.

Answer 1

Answer:

Option (D) is correct.

Explanation:

When there is a falls in the real gross domestic product then as a result the aggregate demand by the consumers decreases, so this will reduce the demand for money because there is a reduction in the overall demand for the products.

Hence, interest rate in this economy must fall to increase the money demand in the economy.

Therefore, we can conclude that as the real GDP falls, then there will be a fall in the money demand and as a result of lower demand for money, interest rate also falls.