In the IS-LM model with interest setting monetary policy and endogenous money, the LM curve is horizontal becauseGroup of answer choicesthe transactions demand for money adjusts to the speculative demand for money through the establishment of the rate of interestdemand for money adjusts to supply of money through the establishment of an equilibrium level of incomedemand for and supply of money brought into equilibrium through the establishment of rate of interestthe quantity of money adjusts to the demand for money for a given policy determined rate of interest

A horizontal LM relation implies thatGroup of answer choiceswhatever the rate of interest, the level of income consistent with money market equilibrium is constantmoney demand responds to changes in the supply of money as income changes, consistent with a policy-determined rate of interestthe central bank holds the money supply constant so that as the level of income and money demand changes the interest rate remains constantnone of the other alternatives are correct.

LM Curve (Liquidity Preference-Money Supply Curve):The LM curve represents equilibrium in the money market, where the demand for money equals the supply of money.It shows all combinations of interest rates and levels of income where the money market is in equilibrium.The LM curve slopes upward, indicating the positive relationship between the interest rate and income. When income increases, the demand for money increases, pushing up interest rates.

Consider the IS/LM model where the LM is horizontal. Suppose that the central announces an increase in its target cash rate. Other things being constant, this would result inGroup of answer choicesa shift up in the LM curve and a reduction in investment expenditurean unchanged LM curve and lower level of outputan unchanged LM curve, since the yield curve is unchanged, and lower outputa shift up in the LM curve and a higher level of output.

In the IS/LM model with a horizontal LM, an expansionary fiscal policy which does not push the economy beyond full-employmentGroup of answer choiceswould lead to a larger shift in the IS curve, the larger is the income –expenditure multiplierwould lead to some crowding-out if the central bank simultaneously undertakes a restrictive monetary policyshould have no effect on interest rates if monetary policy and the yield curve are unchangedall of the other alternatives are correct

The LM curve is upward sloping because a higher level of the money supply is needed to increase output