Rensselaer Polytechnic Institute

• ECON 2020

• Homework Assignment 5 – Key Problem 1 1. True. It is when the LM curve is horizontal, the monetary policy is ineffective. 2. As shown below, when the LM curve is completely vertical any change in the money supply will have a direct effect on equilibrium income. Therefore, an expansionary or contractionary policy will impact equilibrium income. For example, if the Fed buys bonds from banks, this will increase the money supply and the LM curve would shift right lowering the interest rates and increasing equilibrium income. This is a part of the classical theory