The economy is in the horizontal portion of the AS curve,there is a liquidity trap,and investment spending is sensitive to changes in the interest rate.According to the Keynesian transmission mechanism,if the money supply increases the interest rate __________,investment spending __________,the AD curve __________ and the price level __________.
A) falls; rises; shifts to the right; rises
B) falls; rises; shifts to the right; remains unchanged
C) does not change; does not change; does not change; does not change
D) does not change; shifts to the left; does not change; rises
E) rises; falls; left; falls

Question

Quizplus · Accepted Answer

In a liquidity trap, increasing the money supply does not change the interest rate, investment spending, or the AD curve, and thus the price level remains unchanged.

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