According to the Keynesian transmission mechanism (and assuming there is no liquidity trap and investment is not interest insensitive),if the money supply increases,the interest rate __________,investment spending __________ and the AD curve shifts to the __________.
A) falls; falls; left
B) rises; rises; right
C) falls; rises; left
D) falls; rises; right
E) rises; falls; right

Question

Quizplus · Accepted Answer

According to the Keynesian transmission mechanism, an increase in money supply leads to a decrease in interest rates due to an increase in demand for loans. This leads to an increase in investment spending as firms find it cheaper to borrow money to finance their projects. The increase in investment spending leads to an increase in aggregate demand which shifts the AD curve to the right. Therefore, the correct choice is D - falls; rises; right.

According to the Keynesian Transmission Mechanism (And Assuming There Is