Answer to Question #278811 in Macroeconomics for Goel

Question

Show, using the IS and LM curves why money has no effect on output in the classical supply

Answer 1

Because the IS curve determines Y, monetary policy has no effect on production. Only the interest rate can be influenced by monetary policy. Fiscal policy, on the other hand, is effective: output rises by the same amount that the IS curve shifts. The LM curve is vertical if money demand is independent of the interest rate.