The effectiveness of monetary policy in an IS-LM system increases when Group of answer choicesThe IS curve is flatterThe IS curve is steeperThe multiplier is smallerThe LM starts off at a higher level

Assuming a horizontal LM, a smaller income-expenditure multiplier in the IS/LM model would, ceteris paribusGroup of answer choiceshave no impact on monetary policy effectiveness because this variable relates only to the IS functionmake monetary policy less effective in influencing output even though the sensitivity of expenditure to the interest rate is unchangedmake monetary policy less effective in influencing investment but more effective in influencing outputmake monetary policy more effective in influencing investment, but less effective in influencing output.

In the IS/LM model with a horizontal LM, an expansionary fiscal policy which does not push the economy beyond full-employmentGroup of answer choiceswould lead to a larger shift in the IS curve, the larger is the income –expenditure multiplierwould lead to some crowding-out if the central bank simultaneously undertakes a restrictive monetary policyshould have no effect on interest rates if monetary policy and the yield curve are unchangedall of the other alternatives are correct

In the IS-LM model with interest setting monetary policy and endogenous money, the LM curve is horizontal becauseGroup of answer choicesthe transactions demand for money adjusts to the speculative demand for money through the establishment of the rate of interestdemand for money adjusts to supply of money through the establishment of an equilibrium level of incomedemand for and supply of money brought into equilibrium through the establishment of rate of interestthe quantity of money adjusts to the demand for money for a given policy determined rate of interest

Consider the IS/LM model where the LM is horizontal. Suppose that the central announces an increase in its target cash rate. Other things being constant, this would result inGroup of answer choicesa shift up in the LM curve and a reduction in investment expenditurean unchanged LM curve and lower level of outputan unchanged LM curve, since the yield curve is unchanged, and lower outputa shift up in the LM curve and a higher level of output.

Consider the IS-LM model with interest-setting monetary policy. Explain the following: (a) the effect of an expansionary monetary policy on the equilibrium level of real income, the interest rate and the quantity of money; (b) the effect of an expansionary fiscal policy on the equilibrium level of real income, interest rates and the quantity of money. In view of your answer to part (a) identify the factors which in this model determine the effectiveness of monetary policy?