The Keynesian cause-and-effect sequence predicts that a decrease in the money supply will cause interest rates to:
A) fall, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP.
B) fall, boosting investment and shifting the AD curve rightward, leading to a decrease in real GDP.
C) rise, cutting investment and shifting the AD curve rightward, leading to an increase in real GDP.
D) rise, cutting investment and shifting the AD curve leftward, leading to a decrease in real GDP.

Question

Quizplus · Accepted Answer

According to the Keynesian cause-and-effect sequence, a decrease in the money supply will lead to higher interest rates. Higher interest rates will reduce investment spending, leading to a decrease in aggregate demand and a shift of the AD curve leftward. This will lead to a decrease in real GDP. Therefore, the correct option is D.

The Keynesian Cause-And-Effect Sequence Predicts That a Decrease in the Money