Rate of interest is determined by the investment

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1. True or False? In the classical model, the rate of interest is determined by the investment and the saving functions. However, in the Keynesian model, the rate of interest is determined by the equality of aggregate output (GDP) with aggregate expenditure (Y=C+I+G).

2. True or False? When the economy is suffering from a liquidity trap (described in Keynesian economics as a situation where injections of cash into the private banking system by a central bank fail to decrease interest rates which results in monetary policy being ineffective) the demand for money is perfectly elastic with respect to the rate of interest. Therefore, an expansionary monetary policy will lower the rate of interest and increase aggregate output.

Reference no: EM131387234

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