In the case of monetary impotence without a horizontal LM curve,a rise in government expenditures
A)just causes us to move further down the vertical IS curve and so is of no help in raising output.
B)shifts the LM curve downward against a horizontal IS curve and so is of no help in raising output.
C)shifts the vertical IS curve to the right and thus increases output.
D)causes the IS curve to go from vertical to downward-sloping,thus raising output.

Question

Quizplus · Accepted Answer

In the case of monetary impotence without a horizontal LM curve, a rise in government expenditures shifts the vertical IS curve to the right and thus increases output. This is because in the absence of a horizontal LM curve, a rise in government expenditures does not lead to an increase in interest rates and thus does not affect investment demand. As a result, the increase in government expenditure directly increases overall demand and shifts the vertical IS curve to the right, leading to an increase in output.

In the Case of Monetary Impotence Without a Horizontal LM