1. because the real quantity of money demanded is independent of the price level.
2. because the value of money is the reciprocal of the price level.
3. because the real quantity of money demanded depends upon only a limited number of factors such as real income and the interest rate.
4. for none of the above reasons.
Choose the correct option.
Option 1 is the correct one. Since 1/P is on the vertical axis and M is on the horizontal axis the curve relating the two variables will be a rectangular hyperbola whenever the real quantity of money demanded
is a given quantity at any point in time, determined by real income, the nominal interest rate and other factors.
Another way of seeing this is to note that for any given real quantity of money demanded, M and P must vary proportionally with each other to maintain M/P constant. Crucial to all of this, of course, is the notion that it is the real quantity of money that people look at when deciding how much money to hold because the amount of nominal money balances required to produce a given level of transactions services is proportional to the price level. If the price level doubles, twice as much nominal money will be required to make the same number of transactions because the amount exchanged in each transaction will be twice as large.