Consider the AD/AS Model with a Constant Rate of Inflation

question 9

Multiple Choice

Consider the AD/AS model with a constant rate of inflation.In this situation,the money supply is rising.However,interest rates are actually likely to remain stable.Why?

• A)Because the money transmission mechanism does not apply in a situation of sustained inflation.
• B)Because the rising price level is decreasing the demand for money which is pushing interest rates up.
• C)Because the declining interest rates cause the investment demand curve to shift to the right,which causes interest rates to rise.
• D)Because the rising price level is increasing the demand for money,offsetting the impact of the rising money supply.
• E)Because the declining interest rates cause the investment demand curve to shift to the left,which causes interest rates to rise.

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Definitions:

Welfare or Efficiency Loss

The decrease in economic efficiency, often measured as the loss of consumer or producer surplus, due to deviations from perfect competition.

Marginal Revenue

The additional income gained from selling one more unit of a good or service; crucial for determining the optimum level of production.

Economies of Scale

The cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output typically decreasing with increasing scale.

Entry Barrier

Obstacles that make it difficult to enter a particular market, including high start-up costs, strict regulations, or significant competition.