The Keynesian cause-and-effect sequence predicts that a decrease in the money supply will cause interest rates to:
A) fall, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP.
B) fall, boosting investment and shifting the AD curve rightward, leading to a decrease in real GDP.
C) rise, cutting investment and shifting the AD curve leftward, leading to a decrease in real GDP.
D) rise, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP.

Question

Quizplus · Accepted Answer

The Keynesian cause-and-effect sequence predicts that a decrease in the money supply will cause interest rates to rise, cutting investment and shifting the AD curve leftward, leading to a decrease in real GDP. This is because with less money available, the cost of borrowing becomes more expensive, which in turn discourages businesses from investing and consumers from spending. As a result, both aggregate demand and real GDP will decline.

The Keynesian Cause-And-Effect Sequence Predicts That a Decrease in the Money