The quantity of real balances demanded varies ____ with the nominal rate of interest because ________.
A) directly; at higher interest rates people want more money
B) inversely; at lower interest rates people want less money
C) inversely; when people hold more money, they forego interest on other assets
D) directly; real balances are independent of inflation and would not be affected by it
Answer: C) inversely; when people hold more money, they forego interest on other assets
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Under conditions of a liquidity trap and interest-insensitive investment, Keynesians would be most likely to propose __________ policy to eliminate a recessionary gap
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