In the Keynesian model in the long run,a decrease in the money supply will cause ________ in the real interest rate and ________ in the price level.
A)an increase; an increase
B)a decrease; a decrease
C)no change; an increase
D)no change; a decrease

Question

Quizplus · Accepted Answer

In the Keynesian model, in the long run, a decrease in the money supply will lead to no change in the real interest rate because the economy adjusts to its natural level of output where the real interest rate is determined by real factors like productivity and thrift. However, it will cause a decrease in the price level due to the direct relationship between the money supply and the price level, assuming velocity of money and output are constant (Quantity Theory of Money).

In the Keynesian Model in the Long Run,a Decrease in the Money