Since the md is completely interest inelastic the

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Since the MD is completely interest inelastic, the quantity of money demanded is unaffected if the interestrate rises, and it will continue to equal theunchangedquantity of money supplied only if aggregate outputremainsunchangedatY0. Equilibrium in the market for money will occur at the same level of aggregateoutput regardless of the interest rate. In this case, the C-O effect is complete. Private investment hasdeclined by an amount just equal to the increase in government spending.
DY2
Fiscal Policy Effectiveness & the Slope of the LM Curve(d) Completely interest-elastic money demandLMIS0IS1E’ErY0 Y1Yr0Suppose that G(expansionary FP)GIS curve shift to the right (from IS0to IS1)Y (from Y0to Y1)r unchangedFinal equilibrium: r0, Y1Conclusion: G Y Fiscal policy is most effective (has a largest on Y) when money demand is completely interest-elastic.Since the MD is completely interest elastic, only avery small rise in interest rate is required toreequilibratethemoneymarketgiventheunchanged money stock. As a consequence, I & Ydecline by a smallest amount.

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