Question

If the demand for money depends positively on real income and depends inversely on the nominal interest rate, what will happen to the price level today if the central bank announces (and people believe) that it will decrease the money growth rate in the future, but it does not change the money supply today

Answer 1

Explanation:

It would be expected that inflation would be lower in the future.Then we will have it that nominal interest rate decreases, that is it would fall. The Money demand will rise/increase. Now because the central bank would not cause money supply to decrease immediately, prices would then have to fall so as to make the new increased money demand equivalent to the constant money supply. Hence current prices falls because of expected future decrease in the growth rate of money.