Reference no: EM13839514
Suppose that changes in technology cause individuals to demand lower money balances for every nominal interest rate. Suppose the Fed does not adjust the money supply in response. Investigating first the money market and then tracing the effects to the Short-Run Keynesian model, which of the following will happen?
1. The nominal interest rate will fall, the PAE curve will shift up, and short-run equilibrium output will rise.
2. The nominal interest rate will rise, the PAE curve will shift up, and short-run equilibrium output will rise.
3. The nominal interest rate will rise, the PAE curve will shift down, and short-run equilibrium output will fall.
4. The nominal interest rate will fall, the PAE curve will shift down, and short-run equilibrium output will fall.
5. The nominal interest rate will fall, but there will be no effect on PAE and short-run output since changes in nominal interest rates never affect real interest rates.
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