1: money stock or interest rate The LM curve on the right reflects the conduct o

Question

1: money stock or interest rate The LM curve on the right reflects the conduct of present-day monetary policy. The assumption underlying this curve is that the central bank chooses the V then adjusts the V to achieve it. Suppose the central bank determines that current economic conditions justify an increase in the interest rate. LM 1.) Using the line drawing tool, draw a second LM curve to reflect this policy change. Label your curve 'LM" Carefully follow the instructions above and only draw the required object. Output, Y

Explanation / Answer

1. Interest rate

2. Money stock

When LM curve is horizontal at central bank's choice of interest rate.

with the horizontal LM curve, a change in fiscal policy shifts the IS curve and we will see a movement along the LM curve. Because the LM curve is horizontal, we will see only a change in Real GDP. This means that fiscal policy is super effect at changing real GDP because there is no change in the interest rate causing crowding out. A change in monetary policy will shift the LM curve, with an associated movement along the IS curve as normal.

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