Multiple choice

Assertion (A): When the IS curve is not vertical, monetary policy cannot change the level of aggregate demand. Reason (R) Monetary policy depends on the existence of some interest-sensitive spending for its success.

  1. Both (A) and (R) are true and (R) is the correct explanation of (A).

  2. Both (A) and (R) are true but (R) is not the correct explanation of (A).

  3. (A) is true but (R) is false.

  4. (A) is false but (R) is true
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The IS curve shows the relationship between interest rates and output in the goods market. When investment is NOT interest-sensitive (IS is vertical), monetary policy cannot affect output. When IS is NOT vertical (investment IS interest-sensitive), monetary policy CAN change aggregate demand by altering interest rates. The reason correctly states that monetary policy requires interest-sensitive spending to be effective.

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