Increase in money supply in a Keynesian model leads to.....?

Question

An increase in money supply in a Keynesian model leads to:

(a) An increase in income in the short and medium run;

(b) An increase in income in the short run but no change in the medium run;

(c) No change in the level the interest rate or the level of income;

(d) None of the above.


Why?

Answer 1

b) Increase in short run due to money multiplier, but it isn't going to do anything in the medium/long run.

Answer 2

It depends on what is the distinction between medium and short run. I don't know what that is. That's what hard about picking between A and B.

Now that I think about it a bit, I think AS is flat in the short run, tilted up in the medium run and vertical in the long run. If this is the case, then the answer is 'A'.

To call this 'Keynesian' is, of course, wrong. In the real Keynesian model, it also depends on the state of the economy. If you are at full employment you just get a rise in prices. If the economy is at a real bad then no amount of money will increase output due to the liquidity trap.

Answer 3

I would go with b), because, according to Keynesian macroeconomics, the increase in money supply would raise output in the short run, thereby possibly leading to raises, and it would also increase employment in the short run, thereby increasing the average income level. However, the increase in the money supply would lead to inflation, which would probably thwart the aforementioned benefits.

Answer 4

The study of Keynesian Economic Theories is a great exercise in learning what NOT to do.
His theories have been proven WRONG time and time again!
REAL money is created by producing something of value form other materials of lesser value. Therefore, as we become more productive, we can't help but to increase the money supply.
If you just print more money without increases in true production, then you WILL get inflation.

Answer 5

d.

Until savings are spent and new inventions and business models created, there will be little spur in economic growth as the market needs stimulation. Stockpiling money is useful for the smart economist who want to cover himself during times of scarcity or perceived instability. If you don't have financial security in the first place, you may want to look at putting money aside, especially if you are a homeowner. Stockpiling money can be invested into assets that can be liquidated but should have a high yield on a short to medium term basis and can be pulled out.

Answer 6

The question is a little vague, but I would go with (a). An increase in the money supply is stimulatory in the short-run, and somewhat so in the medium term.

It lowers interest rates, which spurs consumption and investment demand.

Answer 7

It will shift the LM curve to the right.Interest rate will decline,while real GDP will increase.