A flat LM curve implies that
A)an increase in government spending will change output by a relatively small amount.
B)a decrease in taxes will change output by a relatively small amount.
C)changes in government spending and taxes will have a large multiple effect on output.
D)A and B.

Question

Quizplus · Accepted Answer

A flat LM curve suggests that the money market is highly sensitive to changes in income, meaning that interest rates do not increase much as income increases. This condition implies that fiscal policy (changes in government spending and taxes) will be very effective in changing output because the interest rate does not rise significantly to crowd out private investment. Therefore, changes in government spending and taxes will have a large multiplier effect on output.

A Flat LM Curve Implies That