Question

How would you expect a fall in a country's population to alter its aggregate money demand function? Would it matter if the fall in population were due to a fall in the number of households or to a fall in the average size of a household?

A.There would be an increase in money demand because fewer people will need to produce and consume GNP. The increase in money demand would be larger if the decrease in population was due to a fall in the average size of a household.

B. There would be a decrease in money demand because there would be fewer transactions. The decrease in money demand would be larger if the decrease in population was due to a fall in the average size of a household.

C. There would be an increase in money demand because fewer people will need to produce and consume GNP. The increase in money demand would be larger if the decrease in population was due to a fall in the number of households.

D.There would be a decrease in money demand because there would be fewer transactions. The decrease in money demand would be larger if the decrease in population was due to a fall in the number of households.

Answer 1

Solution

Option B and D is Correct and Same Answer

B) & D) There would be a decrease in money demand because there would be fewer transactions. The decrease in money demand would be larger if the decrease in population was due to a fall in the average size of a household.

Reason -

A fall in a country’s population would reduce money demand, all else equal, since a smaller population would undertake fewer transactions and thus demand less money. This effect would probably be more pronounced if the fall in the population were due to a fall in the number of households rather than a fall in the average size of a household since a fall in the average size of households implies a population decline due to fewer children who have a relatively small transactions demand for money compared to adults. The effect on the aggregate money demand function depends upon no change in income commensurate with the change in population— else, the change in income would serve as a proxy for the change in population with no effect on the aggregate money demand function.