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

question 11

Multiple Choice

Consider the AD/AS model with a constant rate of inflation.In this situation,the money supply is rising,which tends to reduce interest rates.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 which tends to push interest rates up.
• 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:

Behavioural Order

A concept referring to the structured or organized patterns of behavior observed in individuals or groups.

Negative Relationship

A type of correlation where one variable increases as the other decreases, indicating an inverse relationship between the two.

Correlation

A statistical measure that describes the extent to which two variables change together, but does not necessarily indicate causation.

Research Method

The systematic plan, strategy, and approach that scientists and scholars use to gather, analyze, and interpret data and information to uncover new knowledge.