902 #
© 2014 Pearson Canada Inc.#- Show graphically and explain why targeting an interest rate is preferable when money
demand is unstable and the IS curve is stable.
Answer: See figure below.
Unstable money demand causes the LM curve to shift between LM' and LM". If the money
supply is targeted, output fluctuates between Y' and Y". With an interest rate target, output
remains stable at Y. Since the objective is to minimize output fluctuations, targeting the interest
rate is preferable.
Diff: 2 Type: ES Page Ref: 15
Skill: Applied
Objective List: 28.3 Evaluate how fiscal and monetary policy variables are used in the IS-LM
model
Crowding out will be more pronounced the closer to vertical is the ____.
A) IS curve
B) LM curve
C) consumption function
D) aggregate demand function
Answer: B
Diff: 2 Type: MC Page Ref: 17
Skill: Recall
Objective List: WEB CHAPTER: The ISLM Model
The less interest-sensitive is money demand, the ____.
A) more effective is fiscal policy relative to monetary policy
B) more effective is monetary policy relative to fiscal policy
C) steeper is the IS curve
D) flatter is the LM curve
Answer: B
Diff: 2 Type: MC Page Ref: 13 - 15
Skill: Recall
Objective List: WEB CHAPTER: The ISLM Model