Final answer:
A change in the component of money demand will directly affect the money supply. Money demand interacts with factors like currency supply and demand, interest rates, and the stock market, influencing money supply and nominal GDP. The right option for the final answer is money demand.
Step-by-step explanation:
A change in any one of the components of money demand will directly affect the money supply. This is because money supply refers to the total amount of money in circulation within an economy, which is influenced by the demand for that money. Factors such as the supply and demand of a currency, domestic interest rates, the stock market, and the gold standard can affect money supply and demand.
When considering the velocity of money, which is the rate at which money is exchanged in an economy, we see that if velocity is constant, changes in money supply could lead to changes in nominal GDP. This change in GDP could manifest as either an increase in inflation, real GDP, or both. However, if velocity is unpredictable, then the effect of changes in money supply on nominal GDP becomes uncertain.
In the context of government spending, an increase can shift the aggregate demand (AD) curve to the right, thus raising income and price levels. Conversely, a decrease in the money supply shifts the AD curve leftward, which may lead to higher interest rates and reduced levels of consumption and investment. These dynamics show that any change in money demand has an immediate and direct impact on the money supply. In conclusion, the correct option in the final answer is c) Money demand.