Real GDP of an economy rises while the market rate of interest stays the same. What happens to the demand for money?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Transaction demand rises, speculative demand is unchanged, and total demand rises
Total demand for money = transaction demand + speculative demand.
Transaction demand rises with real GDP, so it rises.
Speculative demand depends only on the rate of interest, which has not changed. So it stays the same.
One part rises and the other is unchanged, so total demand rises.
NCERT (2026-27): “The Speculative Motive … Everyone puts whatever wealth they acquire in the form of money and the speculative demand for money is infinite. Total demand for money in an economy is, therefore, composed of transaction demand and speculative demand. The former is directly proportional to real GDP and price level, whereas the latter is inversely related to the market rate of interest. …” |