The demand for money rises.According to the Keynesian transmission mechanism,the interest rate __________,investment spending __________ (assuming it is interest-sensitive),the AD curve shifts to the __________ and if the AS curve is horizontal,Real GDP __________.
A) rises; falls; left; rises
B) falls; rises; right; does not change
C) rises; falls; right; rises
D) falls; falls; left; does not change
E) rises; falls; left; falls

Question

Quizplus · Accepted Answer

When the demand for money rises, interest rates increase to balance the demand with the available supply. Higher interest rates make borrowing more expensive, which reduces investment spending. This decrease in investment spending causes the aggregate demand (AD) curve to shift to the left. If the aggregate supply (AS) curve is horizontal, indicating a situation of excess capacity or unemployment, a leftward shift in the AD curve would lead to a decrease in real GDP.

The Demand for Money Rises