When an economy’s real income rises but its money supply and price level remain unchanged,

Question

When an economy’s real income rises but its money supply and price level remain unchanged, 

	a.	the interest rate remains unchanged.
	b.	the interest declines because the demand for money shifts to the left.
	c.	the interest declines because people have more money to spend.
	d.	the interest rises because people can afford to borrow at higher interest rates.
	e.	the interest rises because the number of transactions in the economy rises and people will need more money for their transactions.

Answer 1

As income rises the transaction demand for real balances rises. If the central bank does accomodate and holds the money supply fixed then Interest rates must rise to clear the asset markets

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