Suppose that money demand is flat, as is the case at very low interest rates. a.

Question

Suppose that money demand is flat, as is the case at very low interest rates. a. what does this imply for the slope of the LM curve? b .what does this imply for the slope of the IS curve? c. what does this imply for the slope of the AD curve? d. Draw the AD and AS curves, and assume that equilibrium is at a point where output is below the natural level of output. Suppose that the central bank increases the money stock. What will be the effects on output in the short run and in the medium run? Explain in words.

Explanation / Answer

The LM has a flat segment at i=0 and then slopes up. ================================================================================= b. The IS slopes down as before. There is no flat segment at i=0. Arguably, the IS curve is undefined for nominal interest rates below zero =======================================================================================.

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