Question

if investment function becomes unresponsive to interest rate then........
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Answer 1

Answer:

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Answer 2

Answer:

The given question is incomplete without the options, the options for the given question are:

1. Fiscal policy becomes ineffective
2. Fiscal policy becomes effective
3. Monetary policy becomes effective
4. Both fiscal and monetary policy are ineffective

The correct answer for the given question is option 2.

Explanation:

When the function of investment does not have effect or becomes unresponsive on or towards the interest rate, the IS curve becomes vertically inclined position.

• IS curve is a representative of interest rate to level of income.
• IS curve satisfies the given equation as, $Y = C(Y-T) + I(r) +G$
• When investment becomes unresponsive, nothing depends on interest rate and so all parameters become independent.
• To ensure quantity of goods produced, $Y = C + I + G$, goods demanded.
• Hence, IS curve becomes vertical.
• Therefore, monetary policy remains unaffected on output.
• Whereby, fiscal policy gets affected.