Chapter 5R, Problem 20MCQ

To determine

The correct option that defines the reason for an increase in demand for money.

Answer to Problem 20MCQ

Option b is correct.

Explanation of Solution

Explanation for the correct option:

b.

Demand for money increases when there is an increase in real GDP. This is because more goods and services will be bought if real GDP increases which require more money and it will increase the demand for money. Therefore, option b is correct.

Explanation for incorrect options:

a.

Demand for money increases if there is an increase in the price level whereas if the price level decreases then demand money also decreases. Therefore, option a is incorrect.

c.

Demand decreases with the new technologies that allow the person to convert wealth into money more easily. Therefore, option c is incorrect.

d.

Open market operations refer to the buying or selling of T-bills or government securities takes place. It is regulated by Fed when there is a requirement to control excess money. Therefore, option d is incorrect.

e.

If the demand for money increases, then the interest rates also increase to regulate the increasing demand. Therefore, option e is incorrect.

Economics Concept Introduction

Federal Reserve System: It is a central bank that looks after the banking system of the country along with the control of its monetary base. The monetary base is the sum of circulating currency and the reserves in the bank.