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Keynesian transmission mechanism: What is the sequence from money supply change to price level change? Choose the pathway emphasized in Keynesian models before full-employment constraints bind.

Difficulty: Medium

Correct Answer: M ↑ → Interest rate ↓ → Investment ↑ → Income/output ↑ → Prices ↑

Explanation:


Mechanism
Higher money supply lowers interest rates (liquidity preference), stimulates investment, raises aggregate demand and income/output. As capacity tightens, prices rise.


Final Answer
M ↑ → Interest rate ↓ → Investment ↑ → Income/output ↑ → Prices ↑

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