An important debate among macroeconomists concerned the interest rate elasticity of money demand. Monetarists believed that...

An important debate among macroeconomists concerned the interest rate elasticity of money demand. Monetarists believed that money demand was very sensitive to interest rate changes, while Keynesians believed that money demand was insensitive to interest rate changes.
1. Show how different assumptions about the interest rate elasticity of money demand affect the slope of the LM curve. To do this, derive the LM curve for both Keynesians and monetarists on the same set of diagrams so we can visualize the differences.
2. Given what you find in (a), which school of thought believed that a tax cut would have a stronger impact on aggregate output? Illustrate by drawing a new IS-LM diagram with both a monetarist and Keynesian LM curve drawn on it. Explain your logic in detail.

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Rahul Sunny answered 2 years ago

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