Answer to Question #181505 in Macroeconomics for Belinda Kissi

Question

 Use IS-LM diagram to explain what happens to the effectiveness of fiscal policy 

when interest elasticity of demand for money is zero, i.e. c2=O.

Answer 1

There is greater effectiveness of fiscal policy when interest elasticity of demand for money is zero.

When interest elasticity of demand for money is zero the LM curve becomes flatter as the IS curve shifts to the right leading to an increase of Y from Y0 to Y1.