How Do Income and Interest Rates Affect the Quantity of Money

question 28

Multiple Choice

How do income and interest rates affect the quantity of money that households and businesses will demand?

• A)Demand increases if income rises but decreases if interest rates rise.
• B)Demand increases if income rises and increases if interest rates rise.
• C)Demand decreases if income rises but increases if interest rates rise.
• D)Demand decreases if income rises and decreases if interest rates rise.

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Definitions:

Adverse Selection

A situation where asymmetric information leads to the selection of poor risks or unwanted results, commonly discussed in insurance markets and financial services.

Moral Hazard

The situation where one party is more likely to take risks because the negative consequences of those risks will be felt by another party.

Asymmetric Information

Occurs when one party in a transaction has more or superior information compared to another, affecting decision-making.

Moral Hazard

A situation in economics and finance where one party takes more risks because another party bears the cost of those risks.