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 rightward, leading to an increase in real GDP.
D) rise, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP.
E) rise, cutting investment and shifting the AD curve leftward, leading to a decrease in real GDP.

Question

Quizplus · Accepted Answer

According to the Keynesian cause-and-effect sequence, a decrease in the money supply will cause interest rates to rise. This increase in interest rates will reduce investment, as it becomes more expensive for businesses to borrow money. This reduction in investment will shift the aggregate demand (AD) curve leftward, leading to a decrease in real GDP. Therefore, the correct answer is (E) rise, cutting investment and shifting the AD curve leftward, leading to a decrease in real GDP.

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