Which of the following statements is NOT correct under the IS-LM (Fixed Price) model?
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IIT JAM 2022 Question 24: IS-LM model
Answer and worked solution
Answer: (D)
The LM and IS definitions in (A) and (B) are standard, and (C) correctly describes monetary expansion. When the demand for money is relatively insensitive to the interest rate the LM curve is steep, so a given shift in the money stock moves income by a large amount, making monetary policy more effective.
Statement (D) claims the effect is weak in that case, which reverses the result, so (D) is NOT correct.
The trap: (C) An increase in money supply raises income and reduces the interest rate when the IS curve has negative slope and the LM curve has positive slope.
Low interest responsiveness of money demand is easy to associate loosely with weak policy; in the IS-LM diagram it produces a steep LM and strengthens monetary policy.
IS-LM model has come up 137 times in 7 exams since 2004.
What this question tests
This question is on Policy mix and relative effectiveness, part of IS-LM model in Macroeconomics.
Comparing fiscal and monetary policy and combining them to hit income and interest targets.
TestStop has 16 past-paper questions on this subtopic.
Question from the IIT JAM 2022 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.