Describe the Keynesian transmission mechanism for a decrease in the money supply. Assuming that no liquidity trap exists, that investment is interest-sensitive, and that the economy is in the horizontal portion of the AS curve, what happens to Real GDP and the price level? How can you tell if this is a direct transmission mechanism or an indirect one?
When the money supply decreases, interest rates rise and the level of investment decreases. This causes the AD curve to shift leftward, resulting in a decrease in Real GDP and no change in the price level since the AS curve is horizontal. The Keynesian transmission mechanism is an indirect transmission mechanism because changes in the money market must affect the investment goods market before the goods and service market is affected, rather than immediately impacting the goods and services market.
You might also like to view...
If the monopoly illustrated in the figure above could engage in perfect price discrimination, then the lowest ticket price would be
A) $1.00. B) $2.00. C) $3.00. D) $3.50.
Modern Monetarists argue that the velocity of money is
A) constant. B) the inverse of the money multiplier. C) unmeasurable. D) predictable.
Compare and contrast hedge funds and mutual funds in terms of the benefits and drawbacks of each
What will be an ideal response?
Annie had a job as a human resource manager of a restaurant chain that went out of business due to a downturn in the economy
She looked for work for six months and gave up because she was convinced that she could not find a suitable job to fit her skill set. In this instance she would be counted as a A) job leaver. B) reentrant. C) discouraged worker. D) labor force participant.