In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return; thus

A) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.

B) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.

C) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.

D) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.

Question

Business

Abel Potts

30 May, 03:07

In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return; thus

A) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.

B) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.

C) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.

D) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.

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Answers (1)

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Mary Randall · Answer 1

The correct answer is A) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.

Explanation:

Keynesian models are used to identify the level of equilibrium and analyze disruptions in the markets for goods and services, that is, to study production levels as well as aggregate income.

At present, the Keynesian models and the classical model are used as the basis for the complete models, since it has been noted that, even when those models present specifically Keynesian aspects (tales such as imperfect competition), they respond better to classical stimuli, Which has led to the production of a series of "standard models". In addition, he has had a recurrence in the use of the Keynesian model, in a new interpretation, introduced by Gregory Mankiw.