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Suppose the government wants to change the level of output. If the LM curve is horizontal, then
a. monetary policy is completely ineffective, whereas fiscal policy is highly effective.
b. fiscal policy is completely ineffective, whereas monetary policy is highly effective.
Again, suppose the government wants to change the level of output. If the IS curve is vertical, then
a. monetary policy is completely ineffective, whereas fiscal policy is highly effective.
b. fiscal policy is completely ineffective, whereas monetary policy is highly effective.

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Parrain

Answer:

  • a. monetary policy is completely ineffective, whereas fiscal policy is highly effective.
  • a. monetary policy is completely ineffective, whereas fiscal policy is highly effective.

Explanation:

When the LM curve is horizontal, a change in money supply will not impact interest rates which would make monetary supply completely ineffective because people will be able to keep borrowing regardless of the money supply level in the economy.

If the IS curve is vertical, it means that output is independent of interest rates. This would again render monetary supply completely ineffective as output will not change as a result of a change in money supply. Fiscal policy will still work however because it would lead to more output being created via the multiplier process.

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