If the demand for real money balances were completely insensitive to the opportunity cost of holding money,
A)the money market would never be in equilibrium.
B)the goods market would never be in equilibrium.
C)the LM curve would be vertical.
D)the LM curve would be horizontal.

Question

Quizplus · Accepted Answer

The LM curve shows the combinations of interest rates and level of income at which the money market is in equilibrium. If the demand for real money balances were completely insensitive to the opportunity cost of holding money, it means that the demand for money would not change even if there were changes in interest rates or income. In this case, the LM curve would be perfectly vertical, indicating that the equilibrium interest rate is independent of the level of income. This would imply that monetary policy would have no impact on the economy, and the central bank could not use changes in the money supply to influence interest rates and output.

If the Demand for Real Money Balances Were Completely Insensitive