The real stock of money in the economy increases due to :

Question

Accepted Answer

The correct option is 2:
The real stock of money (or real money balance) represents the purchasing power of the nominal stock of money (M). It is calculated by dividing the nominal money supply (M) by the general price level (P), often expressed as the equation: Real Money Stock = M/P. The real money stock indicates the actual quantity of goods and services that the public's money holdings can buy. If the nominal money supply (M) remains constant, a decrease in the general price level (P) mathematically increases the denominator (P), thereby increasing the value of the ratio M/P. This means that each unit of nominal currency is now worth more in terms of goods, leading to a higher real stock of money in the economy. Conversely, an increase in the real stock of money means that people can afford more, which is an expansionary, wealth-effect factor.

The incorrect option is 1:
Increase in prices actually leads to a *decrease* in the real stock of money. When prices rise (inflation), the purchasing power of the fixed nominal money supply falls because the denominator (P) increases, making M/P smaller.

The incorrect option is 3:
Increase in interest rates affects the *demand* for money, not the real *stock* of money. Higher interest rates make holding money costlier (as people forgo greater interest earnings), usually leading people to hold less nominal money, but they do not directly determine the purchasing power of the money stock (M/P).

The incorrect option is 4:
Decrease in interest rates, similar to Option 3, relates to the opportunity cost of holding money and primarily influences the money *demand*. While it might encourage the central bank to adjust the nominal money supply, it does not directly determine the real stock of money, which is defined by the nominal supply divided by the price level.