Which of the following would increase the short- run output effects of a monetary expansion?
A) A decrease in the marginal propensity to save.
B) The slope of the IS curve is very flat.
C) An increase in the marginal propensity to consume.
D) An increase in the interest rate sensitivity of investment.
E) All of the above.

Question

Quizplus · Accepted Answer

A decrease in the marginal propensity to save (Option A) would lead to an increase in consumption spending and therefore aggregate demand, thus increasing short-run output effects. The slope of the IS curve being very flat (Option B) would indicate that small changes in interest rates would lead to large changes in output, thus increasing short-run output effects. An increase in the marginal propensity to consume (Option C) would lead to an increase in consumption spending and therefore aggregate demand, thus increasing short-run output effects. An increase in the interest rate sensitivity of investment (Option D) would lead to a larger response in investment spending to changes in interest rates, thus increasing short-run output effects. Therefore, all of the above options (E) would increase the short-run output effects of a monetary expansion.

Which of the Following Would Increase the Short- Run Output