Question

The Keynesian approach fell out of favor 50 years ago, and now we are in a very different phase of monetary policy with administered rates. However, the Keynesian approach and a regime of administered rates have at least one thing in common. What is it?

Group of answer choices
A. They are both based on the assumption that changes in the family of interest rates will change aggregate demand (total spending).
B. They both specify direct targets for M1 growth
C. They both involve the Fed selling bonds to banks as a way of addressing the problem of unemployment during a recession.
D. They both are intended to prevent the massive scarring of business bankruptcies during a recession.
E. They both intend to raise interest rates as an attempt to prevent disintermediation.

Answer 1

Both the Keynesian approach to economic policy and a regime of administered rates share the common assumption that changes in interest rates can influence aggregate demand, thereby affecting the total spending in the economy.

Step-by-step explanation:

The Keynesian approach to macroeconomic policy involves implementing government intervention to stabilize the economy, typically by increasing aggregate demand when it falls and decreasing it when it rises. The similarity with a regime of administered rates in the context of monetary policy involves the assumption that changes in interest rates will affect aggregate demand. Therefore, both approaches share the common ground that manipulating the interest rates can influence total spending in the economy, aiming to mitigate economic downturns.

Choice A is the correct answer because it states that both the Keynesian approach and a regime of administered rates are based on the assumption that changes in the interest rates can alter aggregate demand.