The economy is in the horizontal portion of the AS curve,investment spending is interest insensitive and there is no liquidity trap.According to the Keynesian transmission mechanism,if the money supply increases the interest rate will __________,investment spending will __________,the AD curve will __________,and Real GDP will __________.

Question

Quizplus · Accepted Answer

In the horizontal portion of the AS curve, an increase in the money supply would typically lower interest rates, but since investment spending is interest insensitive, it remains unchanged. There's no liquidity trap, so the traditional mechanism of lowering interest rates to stimulate investment doesn't apply here. Therefore, the AD curve does not shift, and Real GDP remains unchanged.

The Economy Is in the Horizontal Portion of the AS Curve,investment