In the basic closed-economy ISLM model,as the interest sensitivity of money demand increases,fiscal policy has ________ effect on output and monetary policy has ________ effect on output.
A)less;less
B)more;more
C)more;less
D)less;more

Question

Quizplus · Accepted Answer

In the basic closed-economy ISLM model, as the interest sensitivity of money demand increases, people are more likely to substitute money for bonds as interest rates increase, causing the LM curve to be flatter. In this situation, fiscal policy has a greater effect on output because changes in government spending or taxes have a bigger impact on the interest rate and therefore on investment and output. Conversely, since the interest sensitivity of money demand is higher, monetary policy will have a smaller impact on output because changes in the money supply will have a smaller effect on the interest rate. Therefore, option C is the best choice.

In the Basic Closed-Economy ISLM Model,as the Interest Sensitivity of Money