Suppose investment is independent of GDP. Which answer describes an IS-LM representation of a second economy in which investment is positively correlated with GDP?

Question

Quizplus · Accepted Answer

In an IS-LM model, the IS curve represents the relationship between interest rates and GDP where investment and savings are equal. If investment is positively correlated with GDP, it implies that as GDP increases, investment increases, leading to a greater impact on GDP for a given change in interest rates. This results in a flatter IS curve because it takes a smaller change in interest rates to affect a given change in GDP. The LM curve, which represents the relationship between interest rates and GDP for money market equilibrium, remains unchanged because the change pertains to the investment component of the IS curve, not the money market.

Suppose Investment Is Independent of GDP