Question8 1 pts Consider the ISLM model Start from an equili

Question8 1 pts Consider the IS-LM model. Start from an equilibrium, and assume the interest rate is far from the zero lower bound. Assuming that the central bank effectively pursues a policy of targeting (and maintaining) a specific interest rate , which of the following statements is correct? A monetary expansion will lead to a fiscal contraction A fiscal expansion will lead to a monetary expansion A fiscal expansion will lead to a monetary contraction O More than one of the choices listed is correct A monetary expansion will lead to a fiscal expansion

Solution

Ans is E

An increase in monetary policy will shift the supply of money to the right leading to decrease in imterest rate.

Decrease in interest rate will lead to increase in investment leading to increase in Aggregate demand.