The economy is in the horizontal portion of the AS curve,there is no liquidity trap and investment is sensitive to changes in the interest rate.According to the Keynesian transmission mechanism,if the money supply increases the interest rate will __________,investment spending will __________,the AD curve will shift to the __________,and Real GDP will __________.
A) fall; rise; right; not change
B) fall; rise; left; rise
C) rise; rise; right; rise
D) fall; rise; right; fall
E) fall; fall; left; fall

Question

Quizplus · Accepted Answer

In the Keynesian framework, an increase in the money supply lowers the interest rate, which makes investment cheaper and thus increases investment spending. This increase in investment shifts the aggregate demand (AD) curve to the right, leading to an increase in real GDP. However, because the economy is in the horizontal portion of the aggregate supply (AS) curve, output can increase without changing the price level, meaning real GDP increases without inflationary pressure.

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