Chapter 45, Problem 2MCQ

To determine

The correct option for defining the effect of falling income on the demand for money and the nominal interest rate.

Answer to Problem 2MCQ

Option b is correct.

Explanation of Solution

Explanation for the correct option:

b.

As income has fallen and a country is in recession, demand for money would decrease as there is no output production, and there is an overall fall in the economic growth of the economy. The nominal interest rate also decreases as banks want to add liquidity to the economy. Therefore, option b is correct.

Explanation for incorrect options:

a.

Due to the recession, there will be a decrease in demand for money as well as a decrease in the nominal interest rate. Therefore, option a is the incorrect answer.

c.

During the recession, there will be no increase in demand for money as investors are not investing more. Therefore, option c is incorrect.

d.

Nominal interest rate will decrease instead of increase as there is a recession in the economy. Therefore, option d is incorrect.

e.

To cope with the falling income in Country M, one needs to reduce the nominal interest rates. Therefore, option e is incorrect.

Economics Concept Introduction

International trade: International trade is an exchange of goods and services across nations. This is due to globalization and comparative advantage. It means goods are produced in one country and are sold in some other country.