Question

Answer true or false for the following questions: Suppose demand for real money balances is not...

Answer true or false for the following questions:

Suppose demand for real money balances is not a function of interest rate. Then the LM curve is horizontal.

Suppose investment is not a function of interest rate. Then the LM curve is horizontal.

Suppose investment is not a function of interest rate. Then the IS curve is vertical.
Suppose the LM curve is horizontal. Then monetary policy is ineffective.
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Answer #1

Q1) False. If demand for real money balances is not a function of interest rate, then the LM curve is vertical. It will be horizontal when it is not a function of income

Q2) False. If the investment is not a function of interest rate, then the IS curve is vertical. It does not make a difference to the LM curve.

Q3) True. If investment is not a function of interest rate, the curve is indeed vertical as it shows that for any level of interest rate, the investment is the same.

Q4) False. the LM curve is horizontal, then both fiscal and monetary policy is effective. A decline in interest rates cause the LM curve to shift down which increases output.

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