Answer to Question #287980 in Macroeconomics for lim

Question #287980

Using the IS-LM model, if money demand is sensitive to interest rates and investment is not directly sensitive to interest rates. Monetary policy is more effective than fiscal policy. Right or wrong? Prove it. 


1
Expert's answer
2022-01-17T09:54:13-0500

Stimulating fiscal policy turns out to be most effective with the following combination:

o low sensitivity of investments to changes in the interest rate (graphically corresponds to a relatively steep IS) and

o high sensitivity of money demand to the interest rate and its low sensitivity to changes in total income (graphically corresponds to a relatively flat LM) .


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