Two assumptions made in Gordon's early presentation of the IS-LM model were that the Federal Reserve has ________ control of the money supply and that the money demand function ________ subject to instability.

Question

Quizplus · Accepted Answer

Gordon's early presentation of the IS-LM model assumed that the Federal Reserve has imprecise control over the money supply, given the limitations of monetary policy tools at the time. Additionally, the money demand function was assumed to be relatively stable, as it was believed that people's demand for money was primarily a function of their income and the interest rate. Therefore, the best choice is B, which indicates that the Federal Reserve has imprecise control of the money supply, but the money demand function is not subject to instability.

Two Assumptions Made in Gordon's Early Presentation of the IS-LM