"Even if there is a liquidity trap or interest-insensitive investment, a falling price level will increase the real money supply and real wealth, and this impacts consumption." This is a statement a __________ economist might make as an explanation of why the economy __________ pull itself out of a recession.

Question

Quizplus · Accepted Answer

This statement reflects a Classical economist's perspective on the impact of falling prices on the real economy, in that it will increase the real money supply and wealth, which in turn impacts consumption. The Classical school of thought generally believes that the economy will self-correct, even in times of recession, through mechanisms like flexible prices and wages, and thus the statement suggests that the economy will pull itself out of the recession.

"Even If There Is a Liquidity Trap or Interest-Insensitive Investment