Answer to Question #218827 in Macroeconomics for zain

Question

Using a fixed price IS-LM framework show (graphically) that the effectiveness of monetary policy depends on the shape of the IS curve. 

Answer 1

The relative efficiency of monetary policy, is determined through the curvature of the IS and LM curves. When the LM curve becomes steeper, monetary policy tends to be more effectual. Money demand is less interest elastic when the LM curve becomes steeper. The more the decline in rate of interest when the money supply is raised, the less interest elastic the demand for money becomes.