Question 76

Money demand shifts right when aggregate demand increases.

An increase in aggregate demand typically leads to a higher demand for money as individuals and businesses seek to make more transactions in response to rising economic activity.

A) real interest rate

A change in the real interest rate generally affects the cost of holding money versus investing it. A higher real interest rate tends to decrease the quantity of money demanded, as people prefer to save or invest rather than hold onto cash, making this option incorrect.

B) income taxes

While changes in income taxes can influence disposable income and spending patterns, they do not directly cause a rightward shift in money demand. The effect of taxes on money demand is indirect and less significant compared to other factors, so this option is incorrect.

C) aggregate demand

An increase in aggregate demand leads to higher economic activity, resulting in a greater need for liquidity to facilitate transactions. This direct relationship means that as aggregate demand increases, money demand shifts to the right, making this option correct.

D) real GDP

Although an increase in real GDP is associated with higher economic output and can lead to increased money demand, it is not the most direct factor. Aggregate demand encompasses more than just GDP changes, including consumer confidence and spending, which directly influences money demand shifts. Hence, this option is not the best choice.

Conclusion

The correct answer is C, as an increase in aggregate demand directly correlates with a heightened need for money to support increased transactions in the economy. Options A, B, and D fail to capture the primary driver of money demand shifts, while only C identifies the fundamental relationship between aggregate demand and money demand.