If we change the assumption that money supply is fixed but instead assume that the amount of money supplied increases as the interest rate increases, then

Question

Quizplus · Accepted Answer

If the amount of money supplied increases as the interest rate increases, the LM-curve will become flatter because at higher interest rates, the fed can supply more money to the market, reducing the impact of interest rate changes on investment and output. This scenario also implies that monetary policy will be less effective because the central bank cannot control the money supply as easily.

If We Change the Assumption That Money Supply Is Fixed