Question

In the context of Keynesian money demand, ceteris paribus, the real demand for money increases when

• A. interest rate decreases
• B. income increases
• C. price level decreases
• D. interest rate increases

Hint:

In Keynesian theory, money demand rises with income and falls with the interest rate because interest represents the opportunity cost of holding money.

Answer 1

The Correct Option is A, B

Step 1: Recall Keynesian money demand.
People hold real money for transactions and as a safe store. The amount held rises with income and falls when the interest rate rises, since a high rate makes holding cash costly.

Step 2: Pick the driver that raises demand.
Real money demand goes up when income or the volume of transactions goes up, because more spending needs more cash on hand.

Step 3: Rule out the opposite force.
A higher interest rate would cut money demand, so any option saying demand rises with the interest rate is wrong.

Step 4: Conclude.
So real money demand rises when income rises.
\[ \boxed{\text{when income rises}} \]