(a) (b) There are two possible reasons for the LM curve to be horizontal, one because...

 

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(a) (b) There are two possible reasons for the LM curve to be horizontal, one because of reasons on the money demand side and another because of reasons on the money supply side. Elaborate the two reasons and discuss their implications to the effectiveness of monetary policy. (10 marks) Suppose the central bank of a closed economy chooses to target interest rate. Use the IS-LM-Yn diagram to discuss the effect of a fiscal expansion if there are plenty of unemployed resources and prices are fixed? What will be the effects of the fiscal expansion if the economy is already at full employment. (15 marks) (a) (b) There are two possible reasons for the LM curve to be horizontal, one because of reasons on the money demand side and another because of reasons on the money supply side. Elaborate the two reasons and discuss their implications to the effectiveness of monetary policy. (10 marks) Suppose the central bank of a closed economy chooses to target interest rate. Use the IS-LM-Yn diagram to discuss the effect of a fiscal expansion if there are plenty of unemployed resources and prices are fixed? What will be the effects of the fiscal expansion if the economy is already at full employment. (15 marks)

Answer rating: 100% (QA)

a The LM curve can be horizontal due to reasons on both the money demand and money supply sides 1 Money Demand Side When the demand for money becomes perfectly elastic the LM curve becomes horizontal ... View the full answer