Question

Discuss the efficiency of monetary policy implemented by the money authority under the different circumstances of the slope of the IS Curve.

Answer 1

In each part of the diagram below, an increase in gomoney supply shifts the LM schedule to the right from LMo to LM1. This expansionary monetary policy action has only a small effect on output in part ( a ), where the IS schedule is steep. It has a much larger effect in part b, where the IS schedule is relatively flat.

In part c, where the IS schedule is vertical, the increase in the money supply has no effect on equilibrium income.