Which of the following may block the Keynesian transmission mechanism?
A) the loanable funds market
B) aggregate demand
C) interest-insensitive investment
D) the liquidity trap
E) c and d

Question

Quizplus · Accepted Answer

The loanable funds market, aggregate demand, and interest-sensitive investment all play important roles in the Keynesian transmission mechanism. However, interest-insensitive investment and the liquidity trap may both block the transmission mechanism. Interest-insensitive investment means that businesses are not influenced as much by changes in interest rates, rendering monetary policy less effective. The liquidity trap occurs when nominal interest rates are near zero, and the demand for money becomes infinitely elastic, making monetary policy ineffective. Therefore, the combination of interest-insensitive investment and the liquidity trap can block the Keynesian transmission mechanism.

Which of the Following May Block the Keynesian Transmission Mechanism