Question

Suppose we were in a situation where the interest elasticity of investment is low, and money
demand is very interest elastic. Explain the effect on income of a monetary and fiscal policy
action. Which of the two policies is more effective?

Answer 1

Monetary policy is more effective if the LM curve is steeper (that means that the demand for money is less interest elastic). But in this case money demand is very interest elastic, so fiscal policy is more effective.