If the Federal Reserve "pegs" the interest rate,then in the IS-LM framework,the LM schedule
A)is vertical.
B)becomes horizontal.
C)slopes upward to the right.
D)slopes downward and the left.

Question

Quizplus · Accepted Answer

When the Federal Reserve pegs the interest rate, it means it is setting the interest rate at a specific target and is willing to supply whatever amount of money is necessary to maintain that rate. In the IS-LM framework, this makes the LM (Liquidity preference-Money supply) schedule horizontal because the money supply will adjust to ensure the interest rate remains at the pegged level, regardless of changes in income.

If the Federal Reserve "Pegs" the Interest Rate,then in the IS-LM