Question

Consider the case in which the LM schedule is vertical. Suppose there is a shock that
increases the demand for money for given levels of income and the interest rate. Illustrate
the effect of the shock graphically and explain how income and the interest rate are
affected.

Answer 1

In this case the IS curve will shift to the right without any change in LM curve. As a result income will not change, and the interest rate will increase.