Sia
Question
Statistics
Posted 9 months ago
Hamsterville's national income increased due to an increase in government spending.
How does an increase in national income affect the money market and interest rates?
Choose 1 answer:
A Demand for money increases; interest rates increase
(B) Demand for money increases; interest rates decrease
(C) There is no impact on the money market; interest rates decrease
(D) Supply of money increases; interest rates decreases
(E) Supply of money increases; interest rates increases
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Answer from Sia
Posted 9 months ago
Solution by Steps
step 1
An increase in national income typically leads to an increase in the demand for money because people have more income to spend and save
step 2
When the demand for money increases, the interest rates tend to rise if the money supply remains constant. This is because people are willing to pay more to borrow money
step 3
Therefore, the correct answer is that the demand for money increases and interest rates increase
A
Key Concept
Relationship between national income, money demand, and interest rates
Explanation
An increase in national income increases the demand for money, which in turn raises interest rates if the money supply is unchanged.
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