In an IS-LM model with a given price level : investment is a decreasing function of the interest rate, saving is an increasing function of income, and real money demand is increasing in income and decreasing in the interest rate. The monetary authority chooses nominal money supply so that money-market equilibrium holds the interest rate at a target level. An increase in the target interest rate leads to
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In an IS-LM model with a given price level P: investment is a decreasing function of the interest rate, saving is an increasing function of income, and real money demand M/P is increasing in income and decreasing in the interest rate. The monetary authority chooses nominal money supply M so that money-market equilibrium holds the interest rate at a target level. An increase in the target interest rate leads to (A) a rise in equilibrium output (B) a fall in equilibrium output (C) no effect on equilibrium output (D) an ambiguous effect on equilibrium output
IS-LM model has come up 137 times in 7 exams since 2004.
This question is on Extensions: expected inflation, endogenous money and rate targeting, part of IS-LM model in Macroeconomics.
Variations on the basic model: inflation expectations, money supply that responds, and central banks that target the rate.
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Question from the DSE 2020 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.