In the new Keynesian approach, an increase in the nominal money supply affects output by
A)directly increasing the wealth of consumers and, therefore, their spending.
B)reducing the real interest rate, thereby stimulating consumption, investment, and net exports.
C)allowing the government to increase its expenditures.
D)increasing the funds available for saving, thereby stimulating investment spending.

Question

Quizplus · Accepted Answer

According to the new Keynesian approach, an increase in the nominal money supply reduces the real interest rate, which stimulates consumption, investment, and net exports. This occurs because a decrease in the real interest rate reduces the cost of borrowing for firms and households, encouraging investment and consumption. Additionally, a decrease in the real interest rate makes domestic goods relatively cheaper, leading to an increase in net exports. Therefore, option B is the correct answer. The other options are either incorrect or incomplete explanations.

In the New Keynesian Approach, an Increase in the Nominal