What does the demand curve for money look like? Why? What will ...

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What does the demand curve for money look like? Why?
 
  What will be an ideal response?

Question 2

If the economy is experiencing an inflationary gap in the short run, an increase in the budget surplus
 
  A) will reduce the size of the inflationary gap.
  B) will increase the size of the inflationary gap.
  C) will cause an increase in inflation and increase aggregate supply.
  D) will increase aggregate demand and will increase the price level.

[owenfalvey]

Answer to Question 1

If the quantity of money is on the horizontal axis and the interest rate on the vertical axis, the demand curve for money is a downward sloping curve or line. People hold money because of money's role as a medium of exchange and a store of value. The lower the interest rate the lower the cost to hold money balances since the forgone interest is lower. People will hold more balances when the price of doing so is less, so the demand curve for money slopes down.

Answer to Question 2

A

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Excellent

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