Economics · Macroeconomics - IS-LM Model
An economy experiences expansionary fiscal policy alongside contractionary monetary policy via a repo rate hike. If the money demand function is highly interest-elastic and the investment demand function is moderately interest-inelastic, which outcome is most likely to dominate?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1A moderate increase in interest rate (r) and a full negation of the Fiscal Multiplier due to tightening.
- 2An indeterminate change in interest rate (r) and a moderate increase in output (Y) meeting Liquidity Trap conditions.
- 3A large increase in interest rate (r) and a moderate increase in output (Y) driven by the Accelerator Principle.
- 4A large increase in interest rate (r) and an indeterminate change in output (Y) with a dominant Crowding Out Effect.✓
Correct answer
A large increase in interest rate (r) and an indeterminate change in output (Y) with a dominant Crowding Out Effect.
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