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When we derive the LM curve, we assume that supply of money is exogenous. However, let's say the central bank has some target interest,r1, and it adjust supply of money to keep interest rates equals to r1

With this assumption, what is the slope of the LM curve?

  • I think it will be horizontal because supply of money is horizontal.

What is the slope of the AD curve?

  • I think it will be vertical because there will be no change in output since the LM curve is horizontal.

I am not sure about those two.. so can someone tell me whether they are right or wrong?

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  • $\begingroup$ Does the central bank targets a real or a nominal interest rate? This is a critical clarification. $\endgroup$ – Alecos Papadopoulos May 6 '15 at 0:34

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