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.
General Knowledge
Indian Economy
Difficulty: Medium
Choose an option
-
AM ↑ → Prices ↑ directly (no other channel)
-
BM ↑ → Interest rate ↓ → Investment ↑ → Income/output ↑ → Prices ↑
-
CM ↑ → Taxes ↑ → Prices ↑
-
DM ↑ → Exchange rate ↑ → Prices ↓
Answer
Correct Answer: M ↑ → Interest rate ↓ → Investment ↑ → Income/output ↑ → Prices ↑
Explanation
MechanismHigher money supply lowers interest rates (liquidity preference), stimulates investment, raises aggregate demand and income/output. As capacity tightens, prices rise.
Final AnswerM ↑ → Interest rate ↓ → Investment ↑ → Income/output ↑ → Prices ↑