If both investment and net exports are totally insensitive to changes in the interest rate, then
A) the IS curve is horizontal.
B) the IS curve is vertical.
C) the LM curve is horizontal.
D) the LM curve is vertical.
E) the IS curve is horizontal and the LM curve is vertical; a unique equilibrium pair R*, Y*) is thereby defined unambiguously.

Question

Quizplus · Accepted Answer

The IS curve represents the relationship between the interest rate and the level of income that brings the goods market into equilibrium. If investment and net exports are totally insensitive to changes in the interest rate, it means that changes in the interest rate do not affect the equilibrium level of income in the goods market. Therefore, the IS curve is vertical, indicating that the level of income that equilibrates the goods market is the same regardless of the interest rate.

If Both Investment and Net Exports Are Totally Insensitive to Changes