If the LM Curve Were Vertical, Then an Increase in Government

question 53

Multiple Choice

If the LM curve were vertical, then an increase in government spending or a reduction in taxes would

• A) do nothing but increase GDP and leave interest rates fixed.
• B) do nothing but increase interest rates, so that the resulting reduction in investment would exactly cancel the stimulative effects of either fiscal policy.
• C) increase interest rates a bit but still generate some small increase in GDP.
• D) stimulate growth in GDP only if it were accompanied by an increase in the money supply.
• E) none of the above.

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