Answer to Question #211476 in Macroeconomics for Bhavika Chhabra

Question

Explain that fiscal policy is less effective than monetary policy in a situation when investment is very interest elastic and money demand is very interest inelastic

Answer 1

If the LM curve is vertical, fiscal policy is absolutely ineffectual. It indicates that money demand is perfectly interest inelastic. Only the interest rate rises when the IS curve changes upwards, and an increase in government expenditure has no effect on national income.