Economics · Macroeconomics
In the context of the IS-LM framework, which of the following statements is false?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The Pigou effect restores the effectiveness of monetary policy even under a liquidity trap.
- 2Fiscal policy is least effective and monetary policy is most effective, the higher the interest sensitivity of money demand and the lower the interest sensitivity of investment demand.✓
- 3Crowding out is complete when money demand is perfectly interest inelastic and investment is perfectly interest elastic.
- 4The IS curve is steeper, the lower the value of the Keynesian Multiplier and the lower the interest sensitivity of investment demand.
Correct answer
Fiscal policy is least effective and monetary policy is most effective, the higher the interest sensitivity of money demand and the lower the interest sensitivity of investment demand.
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