Answer to Question #301322 in Macroeconomics for Wasim Alam

Question

1. What would the LM curve look like in a classical world? If this really were the LM curve that we thought best characterized the economy, would we lean toward the use of fiscal policy or monetary policy? (You may assume your goal is to affect output.) Explain in 250-300 words using the diagram

2. Show, using IS and LM curves, why money has no effect on output in the classical supply case. Explain in 500 words. Use diagram wherever necessary.

Answer 1

A)

A fiscal policy would be most effective in the above case.

B)

Increase in money supply causes an increase in savings and investment while decrease in money supply causes a decrease in the investment and savings.