Question
A less elastic IS curve means that :
The correct answer is
Monetary policy is less effective
Less Elastic IS Curve Implications
The IS curve represents equilibrium in the goods market, showing combinations of interest rates and output where goods and services demand equals supply. An IS curve's elasticity indicates how responsive output (Y) is to changes in the interest rate (i).
A less elastic IS curve signifies that output is relatively unresponsive to changes in the interest rate. This means the IS curve is steeper.
Monetary Policy Effectiveness
Monetary policy primarily influences the economy by adjusting the interest rate, shifting the LM curve.
- When the IS curve is steep (less elastic), a given change in the interest rate (induced by monetary policy) results in a smaller change in equilibrium output.
- For example, if the central bank lowers interest rates to boost the economy, a steeper IS curve implies that aggregate demand and thus output will increase only slightly.
- Therefore, a less elastic IS curve means monetary policy is less effective in stimulating or dampening economic activity.
Conversely, a steeper IS curve generally implies that fiscal policy is more effective, as interest rate changes have a smaller dampening effect on the output response to fiscal expansion or contraction.
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Important Questions from Macroeconomics
- In Keynesian framework, at full employment, which of the following is/are true ?
(a) Supply curve in the short period is inelastic.
(b) The supply is influenced by the increase in the quantity of money.
Select the answer from the code given below : - When LM curve is vertical, which one of the following is correct ? An increase in money supply will lead to :
- Crowding out will emerge in the economy, if :
- Which among the following were neglected by Keynes in his theory of employment ?
- Which of the propositions of the past income hypothesis of Duesenberry are correct ? Choose from the code below :
Statements :
I. The current consumption is a function of not only current income, but also the past income.
II. There is asymmetrical relationship between income and consumption during contraction and expansion.
III. Consumption income relationship is irreversible.
IV. Consumption falls less than income during depression, but the rise in consumption is much more during expansion.
Codes :
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