Economics (MindTap Course List)
Solutions
Economics (MindTap Course List)
Graphically portray the Keynesian transmission mechanism under the following conditions:
- a. A decrease in the money supply
- b. No liquidity trap
- c. Downward-sloping investment demand
(a)
Effects of money supply in Keynesian transmission mechanism.
According to Keynesian transmission mechanism, the monetary policy operates only when the LM curve is vertical, as shown in the figure given below:
According to the figure, through contractio...
(b)
Distinguish between Keynesian transmission mechanism and the liquidity trap.
(c)
Reason for downward sloping investment demand.
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