Which Scenario Best Explains the Keynesian Transmission Mechanism When the Money

question 130

Multiple Choice

Which scenario best explains the Keynesian transmission mechanism when the money supply increases while the money market is in a liquidity trap?

• A) The interest rate and investment are not affected; there is no shift in the AD curve.
• B) The interest rate falls,investment rises,total expenditures rise,and the AD curve shifts rightward.
• C) The interest rate falls,investment falls instead of rising,and the AD curve ends up shifting leftward.
• D) The interest rate falls,but investment does not respond; there is no change in total expenditures and no shift in the AD curve.

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Definitions:

Debt-equity Ratio

This ratio compares a company's total liabilities to its shareholder equity, indicating the relative proportion of shareholder equity and debt used to finance a company's assets.

Pre-tax Cost

This is the cost of an investment or financial activity before the application of taxes.

Cost of Equity

The return that investors expect for investing in a company's equity, often estimated using models like the Capital Asset Pricing Model (CAPM).

Weighted Average Cost

The combined cost of both variable and fixed goods, services, or sources of finance, weighted according to their proportions.