A monetary policy that tries to maintain fairly constant interest rates
A) makes random shocks to the IS curve more harmful in terms of variation in GDP.
B) makes random shocks to the IS curve less harmful in terms of variation in GDP.
C) makes random shocks to the LM curve more harmful in terms of variation in GDP.
D) has no effect on the sensitivity of GDP to random shocks in the IS curve.
E) has no effect on the sensitivity of GDP to random shocks in the LM curve.

Question

Quizplus · Accepted Answer

When monetary policy aims to maintain constant interest rates, it cannot respond effectively to shifts in the IS curve, making GDP more sensitive to such shocks.

A Monetary Policy That Tries to Maintain Fairly Constant Interest