2. Describe the Keynesian transmission mechanism for a decrease in the money supply. Assuming that no liquidity trap exists, that investment is interest-sensitive, and that the economy is in the horizontal portion of the AS curve, what happens to Real GDP and the price level? How can you tell if this is a direct transmission mechanism or an indirect one?
The Keynasian Transmission mechanism for a decrease in the money supply occurs in three steps -
First, there is a decrease in money which leads to a risein interest rate as competiton for lonable funds tightens up.
Second, the rise in interest rates, makes borrowing costlier. Some investment become less profitable and crowd out. Investment spending falls.
Finally, a fall in investment causes aggregate spending to fall. This results in a greater decrease in output through the multiplier effect.
Based on the given conditions, there is a horizontal AS curve. This means that we are in the very short run/Keynasian zone of AS curve. This is so because of the supply being perfectly price elastic. This can be attributed to the fact that wages are completely rigid and prices do not adjust at all. So due to decrease in money supply, AD decreases and shifts to the left from AD1 to AD2. This causes output to fall from Y1 to Y2 with no change in price. Real GDP falls. Prices are unchanged.
The transmission mechanism is indirect here because change in money supply impacts aggregate demand through interest rates.
2. Describe the Keynesian transmission mechanism for a decrease in the money supply. Assuming that no...
The money supply decreased and the AD curve shifted to the left. This is consistent with the Keynesian transmission mechanism when there is neither a liquidity trap nor interest-insensitive investment. monetarist transmission mechanism. Keynesian transmission mechanism when there is a liquidity trap. Keynesian transmission mechanism with interest-insensitive investment. a and b
Question 24 2 pts Which of the following may block the Keynesian transmission mechanism? O interest-insensitive investment O interest-insensitive investment O interest-insensitive investment and liquidity trap O liquidity trap 2 pts Question 25 $335/quizzes//4947/take G Which of the follo... Question 23 2 pts Business taxes fall. This shifts curve shifts rightward. which raises and the labor demand curve; labor productivity and investment; SRAS labor supply curve; labor productivity and investment; AD labor supply curve; labor productivity and investment; AD O...
The following graph shows the money market in a hypothetical economy. The money supply is currently $200 billion, so the equilibrium interest rate is 0.5%, as shown by the grey star labeled A. Money Supply 0.9 0.8 New MS 0.7 .+ 0.6 INTEREST RATE (Percent) 0.5 Money Demand 0.4 0.3 0.2 0.1 0 800 100 200 300 400 500 600 700 QUANTITY OF MONEY (Billions of dollars) True or False: According to the Keynesian view of the economy, this economy...
The pre-Keynesian or classical economic theory viewed the long-run aggregate supply curve for the economy to be: a. vertical at the full-employment level of real GDP. b. positively sloped at the full-employment level of real GDP. c. horizontal at the full-employment level of real GDP. d. backward bending at the full-employment level of real GDP.
Describe the effects, according to both views (Classical and Keynesian), of an increase in the money supply. Explain what happens to real output and the price level. Use the AD-AS model diagram to discuss the effects.
Describe the effects, according to both views (Classical and Keynesian), of an increase in the money supply. Explain what happens to real output and the price level. Use the AD-AS model diagram to discuss the effects.
2. Chapter 11, The Keynesian Cross (5 points): • In the Keynesian cross, assume that the consumption function is given by: C = 200 +0.75(Y - T) Planned investment is 100, government purchases and taxes are both 100. (a) Graph planned expenditure as a function of income. (b) What is the equilibrium level of income? (c) If government purchases increase to 125, what is the new equilibrium income? (d) What level of government purchases is needed to achieve an income...
When the money demand curve shifts right and the money supply is unchanged, the equilibrium price level decreases and the equilibrium value of money increases. true false The money supply in Grayfield is $8 billion. Nominal GDP is $32 billion and real GDP is $24 billion. The central bank of Grayfield has instituted a policy of zero inflation. Assuming that velocity is stable, if real GDP grows by 2.5 percent this year then the central bank of Grayfield will increase...
Starting from the top drop down questions: 1. Fall / rise 2. 18% / 12% / 3% / 9% / 6% / 15 % 3. increase / decrease 4. up / down 5. more / less 6. an increase / no change / a decrease 7. an increase / no change / a decrease 8. an increase / no change / a decrease 3. The Keynesian transmission mechanism Suppose the Federal Reserve shifts to an expansionary monetary policy by buying...
5. In the Keynesian model which of the following would be most likely to have the largest impact on aggregate demand a. an increase in the money supply b. a change in government expenditure c. a change in investment expectations d. both a and c e. both b and c 6. In the Keynesian theory of liquidity demand and the interest rate which of the following occurs during excess supply of money. a. individuals sell bonds, driving interest rates down...