Question

Using the IS-LM model, if money demand is sensitive to interest rates and investment is not directly sensitive to interest rates. Monetary policy is more effective than fiscal policy. Right or wrong? Prove it. 

Answer 1

Stimulating fiscal policy turns out to be most effective with the following combination:

o low sensitivity of investments to changes in the interest rate (graphically corresponds to a relatively steep IS) and

o high sensitivity of money demand to the interest rate and its low sensitivity to changes in total income (graphically corresponds to a relatively flat LM) .