A flat IS curve implies that
A)an increase in money supply will change output by a relatively small amount.
B)a decrease in taxes will change output by a relatively large amount.
C)changes in money supply will have large multiplier effects on output.
D)A and B.

Question

Quizplus · Accepted Answer

A flat IS curve indicates that there is little sensitivity of output to changes in interest rate. This in turn means that changes in money supply will have large multiplier effects on output, implying that Choice C is the best answer. Choice A is incorrect because a flat IS curve indicates that output changes by a relatively small amount in response to changes in interest rate, not money supply. Choice B is incorrect because the relationship between changes in taxes and output depends on other factors besides the shape of the IS curve.

A Flat IS Curve Implies That