Using the Keynesian model,the effect of a government-imposed ceiling on interest rates paid on personal chequing accounts that is lower than the current market interest rate would be to cause ________ in the real interest rate and ________ in output in the short run.
A)a decrease;a decrease
B)a decrease;no change
C)a decrease;an increase
D)an increase;a decrease

Question

Quizplus · Accepted Answer

According to the Keynesian model, a government-imposed ceiling on interest rates paid on personal chequing accounts would decrease the real interest rate because it lowers the opportunity cost of holding money, making saving less attractive. This, in turn, would lead to an increase in aggregate demand and output, resulting in an increase in investment, consumption, and government spending. Therefore, in the short run, the real interest rate would decrease, and output would increase. Choice A is incorrect because the model suggests that output would increase, not decrease. Choice B is incorrect because a decrease in the real interest rate would lead to an increase in output. Choice D is incorrect because an increase in the real interest rate would reduce investment and aggregate demand, leading to a decrease in output.

Using the Keynesian Model,the Effect of a Government-Imposed Ceiling on Interest