Question
Microeconomics Question on General equilibrium and welfare
Which of the following statements is NOT correct under the IS-LM (Fixed Price) model?
The LM curve represents the combinations of income and interest rate, where money market is in equilibrium.
The IS curve represents the combinations of income and interest rate, where product market (goods and services) is in equilibrium.
An increase in money supply raises income and reduces interest rate when the IS curve has negative slope and the LM curve has positive slope.
Monetary policy has a relatively weak effect on income when the interest responsiveness of the demand for money is relatively low.
Monetary policy has a relatively weak effect on income when the interest responsiveness of the demand for money is relatively low.
Solution
The correct option is (D): Monetary policy has a relatively weak effect on income when the interest responsiveness of the demand for money is relatively low.