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.
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) .