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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

“According to the Keynesian transmission mechanism, as the money supply rises, there is a direct impact on the goods-and-services market.” Do you agree or disagree with this statement? Explain your answer.

To determine

The Keynesian transmission mechanism.

Explanation

Disagree. According to the Keynesian transmission mechanism, when the money market is in the liquidity trap, an increase in the money supply will not influence the interest rates. This implies that the investment or the goods and services market also remain unaffected. When the money market is not in the liquidity trap, an increase in the money supply indirectly influences the goods and services market. This is due to the reason that an increase in the money supply leads to a reduction in the interest, which results in an increase in the investment...

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