A steep LM curve implies that
A)an increase in government spending will change output by a relatively small amount.
B)a decrease in taxes will change output by a relatively small amount.
C)changes in government spending and taxes will have a large multiple effect on output.
D)A and B.

Question

Quizplus · Accepted Answer

A steep LM curve implies that changes in government spending and taxes will have a small effect on output. This is because a steep LM curve means that interest rates are highly responsive to changes in the money supply. Therefore, the demand for money is highly inelastic, and monetary policy is less effective. This means that fiscal policy, such as changes in government spending and taxes, will have a small effect on output.

A Steep LM Curve Implies That