Question

What would be the effect on the LM curve and the underlying money demand function if the demand for money became less responsive to changes in income? What does this imply about the effectiveness of monetary policy?

Answer 1

If the LM curve is less responsive to the changes in income it means that the monetary policy has no affect on the LM curve. If there is an effect on the LM curve there will be shift in the LM curve where the intrest rates in the economy decreases and the due to this decrease in intrest rates the consumption will be more which in turn make money supply more thus there will be boom in economy.

Monetary policy are usually formed to create growth in economy. If there no effect on the LM curve than it means the monetary policy had no effect on the economy.