Assume the Keynesian transmission mechanism is operational and the economy is currently operating in the horizontal portion of the AS curve.If the money supply increases and the demand for money curve is downward sloping and investment is interest ____________,then Real GDP will ___________________.
A) sensitive; rise
B) insensitive; remain unchanged
C) sensitive; remain unchanged
D) insensitive; rise
E) a and b

Question

Quizplus · Accepted Answer

In the horizontal portion of the AS curve, output can increase without affecting the price level, meaning the economy can grow without inflationary pressures. If investment is interest sensitive (A), an increase in the money supply can lower interest rates, stimulating investment and increasing real GDP. If investment is interest insensitive (B), changes in the money supply and hence interest rates have little to no effect on investment, so real GDP remains unchanged. Both scenarios are plausible depending on the sensitivity of investment to interest rates.

Assume the Keynesian Transmission Mechanism Is Operational and the Economy