Question

which property renders the LM curve steep?

		high interest elasticity of investment demand
		low interest elasticity of investment demand
		low interest elasticity of money demand
		high interest elasticity of money demand

Fiscal policy is most likely to be effective when which of the following characterize the IS/LM curves.

		IS curve is steep and LM curve is flat
		IS curve is flat and LM curve is flat
		IS and LM are steep
		IS is flat and LM is steep

Considering speculative demand for money, how would the expectation of a future rise in interest rates effect money demand?

   
-expectation of capital loss on bonds, increase in money demand

   
-expectation of capital loss on bonds, reduction of money demand

   
-expectation of capital gain, reduction of money demand

   
-expectation of capital gain, increase in money demand

Answer 1

1. Which property renders the LM curve steep?

Correct Option is: low interest elasticity of money demand

Reason: With low interest elasticity, the money demand will not fluctuate with the change in the interest rate and shapes the LM curve steep. Interest elasticity is one of the factor responsible for slope of LM curve.

2. Fiscal policy is most likely to be effective when which of the following characterize the IS/LM curves

Correct Option is: IS is flat and LM is steep

Reason: Change in fiscal policy affects the aggregate demand and therefore when IS curve is steep, fiscal policy is more effective.

3. Considering speculative demand for money, how would the expectation of a future rise in interest rates effect money demand?

Correct Option is: Expectation of capital loss on bonds, increase in money demand

Reason: The bond price has inverse relationship with the interest rate and therefore, with higher rate of interest, the price of bonds will fall lower and the bond holder must have to bear capital loss. Also, the interest rate and the demand of money is also inversely related. This lead to the higher money demand.