Question

The economy is in the horizontal portion of the AS curve, investment spending is interest insensitive and there is no liquidity trap. According to the Keynesian transmission mechanism, if the money supply increases the interest rate will __________, investment spending will __________, the AD curve will __________, and Real GDP will __________.

Answer 1

Answer: does not change, does not change, does not change, does not change.

Explanation: Keynesian transmission mechanism traditional state that, changes in money supply affect aggregate demand through changes in interest rate or exchange rate.

If the money supply increases the interest rate will "does not change", investment spending will "not change ", and the AD curve "not change", and the real GDP will "not change".