Question

The demand for money rises. According to the Keynesian transmission mechanism, the interest rate __________, investment...

The demand for money rises. According to the Keynesian transmission mechanism, the interest rate __________, investment spending __________ (assuming it is interest-sensitive), the AD curve shifts to the __________ and if the AS curve is horizontal, Real GDP __________.

               a.            rises; falls; left; rises

               b.           falls; rises; right; does not change

               c.            rises; falls; right; rises

               d.           falls; falls; left; does not change

               e.            rises; falls; left; falls

There is an increase in the money supply and the interest rate does not change. This is what happens if

               a.            investment is interest-insensitive.

               b.           a liquidity trap exists.

               c.            activist monetary policy is used instead of nonactivist monetary policy.

               d.           wages and prices are flexible.

               e.            none of the above

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Answer #1

The demand for money rises. According to the Keynesian transmission mechansim, the interest rate rises, investment spending falls,the AD curve shifts to the left and if the AS curve is horizontal, Real GDP falls.

Answer: Option (e)

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There is an increase in the money suuply and the interest rate does not change if there is liquidity trap.

Liquidity trap occurs when Money supply curve intersects horizontal portion of money demand .

Answer: Option (b)

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