The monetary policy is completely ineffective when the LM curve is:
A)Vertical .
B)Horizontal.
C)Upward sloping.
D)Downward sloping

Question

Quizplus · Accepted Answer

The LM curve represents the relationship between liquidity preference and money supply in the economy. When the LM curve is horizontal, it implies that the demand for money is perfectly elastic. In this scenario, changes in the interest rate have no effect on the quantity of money demanded, rendering monetary policy ineffective. This is because any increase in the money supply can be absorbed without changing the interest rate, meaning that monetary policy cannot influence the economy through interest rate adjustments.

The Monetary Policy Is Completely Ineffective When the LM Curve