When the demand for money depends only on real income, the resulting ________ LM
ID: 1093595 • Letter: W
Question
When the demand for money depends only on real income, the resulting ________ LM curve causes fiscal policy to have a ________ effect on income.
horizontal, very strong
vertical, very strong
vertical, zero
horizontal, zero
4. A lower interest rate ________ Ap and thus causes ________ the IS curve.
lowers, a parallel leftward shift of
raises, movement downward along
lowers, movement upward along
raises, a parallel rightward shift of
a.horizontal, very strong
b.vertical, very strong
c.vertical, zero
d.horizontal, zero
Explanation / Answer
vertical, zero
The LM curve represents the combinations of income and the interest rate at which the money market is in equilibrium. If money demand does not depend on the interest rate, then we can write the LM equation as
M/P = L(Y).
For any given level of real balances M/P, there is only one level of income at which the money market is in equilibrium. Thus, the LM curve is vertical. Fiscal policy now has no effect on output; it can affect only the interest rate.
raises, movement downward along
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