True left right Keynes argued that if an economy is experiencing a liquidity t government should use policy to stimulate the economy. This will shift the curve to the

The following graph shows the money market in a hypothetical economy. The money supply is currently $200 billion, so the equilibrium interest rate is 0.5%, as shown by the grey star labeled A. Money Supply 0.9 0.8 New MS 0.7 .+ 0.6 INTEREST RATE (Percent) 0.5 Money Demand 0.4 0.3 0.2 0.1 0 800 100 200 300 400 500 600 700 QUANTITY OF MONEY (Billions of dollars)

True or False: According to the Keynesian view of the economy, this economy is currently in a liquidity trap. True False Suppose the Federal Reserve increases the money supply by $200 billion. Use the green line (triangle symbols) to draw the new money supply (new MS) curve. Then, use the black point (plus symbol) to indicate the new money market equilibrium. As a result of the Federal Reserve’s action, the equilibrium interest rate increases to 0.6% The following graph shows the investment demand curve in this econom black point (plus symbol) to indicate the equilibrium interest rate and th decreases to 0.3% point A indicates the initial equilibrium. Use the tharacterize the economy following a monetary expansion. decreases to 0.2% decreases to 0.4% remains unchanged at 0.5%

The following graph shows the investment demand curve in this economy. As in the previous example, point A indicates the initial equilibrium. Use the black point (plus symbol) to indicate the equilibrium interest rate and the level of investment that will characterize the economy following a monetary expansion. 0.9 0.8 0.7 0.6 INTEREST RATE (Percent) 0.5 0.4 Demand for Investment 0.3 0.2 0.1 0 50 350 400 100 150 200 250 300 INVESTMENT (Billions of dollars)

True or False: In this case, the Federal Reserve’s action stimulates investment. False True Keynes argued that if an economy is experiencing a liquidity trap, the government should use policy to stimulate the economy. This will shift the curve to the

False fiscal True monetary Keynes argued that if an economy is experiencing a liquidity trap, the government should use policy to stimulate the economy. This will shift the curve to the

Fa short-run aggregate supply Tri aggregate demand long-run aggregate supply Keynes argue will shift the iencing a liquidity trap, the government should use policy to stimulate the economy. This curve to the

True left right Keynes argued that if an economy is experiencing a liquidity t government should use policy to stimulate the economy. This will shift the curve to the