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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

Graphically portray the Keynesian transmission mechanism under the following conditions:

  1. a. A decrease in the money supply
  2. b. No liquidity trap
  3. c. Downward-sloping investment demand

(a)

To determine

Effects of money supply in Keynesian transmission mechanism.

Explanation

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)

To determine

Distinguish between Keynesian transmission mechanism and the liquidity trap.

(c)

To determine

Reason for downward sloping investment demand.

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