Suppo that investment in the goods market is not responsive to the interests rate (that is , Investment does not depend on the interest rate at all) then the IS Curve is vertical line and monetary policy does not affect output in the IS-LM model
If investment in the goods market is not responsive to the interest rate, this means that changes in the interest rate will not have any effect on investment decisions. As a result, the investment component of aggregate demand will remain constant regardless of changes in the interest rate.
In the IS-LM model, the IS curve represents the equilibrium relationship between output and the interest rate in the goods market. Typically, the IS curve is upward sloping, indicating that a decrease in the interest rate leads to an increase in investment and hence an increase in output.
However, if investment is not responsive to the interest rate, the IS curve becomes a vertical line. This means that changes in the interest rate will have no effect on output, as investment remains constant.
In this scenario, monetary policy, which operates through changes in the interest rate, will not have any impact on output. The LM curve, representing the equilibrium relationship between the interest rate and the money market, may still exist and determine the nominal interest rate. But since investment is not influenced by the interest rate, changes in monetary policy will not affect output in the economy.
This implies that the effectiveness of monetary policy in stimulating or dampening economic activity is limited in this specific scenario. Other factors, such as fiscal policy or external shocks, may become more important in driving changes in output.
If investment in the goods market is not responsive to the interest rate, this implies that there is no relation between the interest rate and the level of investment. In this case, the IS curve in the IS-LM model would be a vertical line.
The IS curve represents combinations of interest rates and levels of output where the goods market is in equilibrium. In a typical IS curve, a decrease in the interest rate would lead to an increase in investment and consequently higher output. However, if investment does not depend on the interest rate, then changes in the interest rate would not affect investment and therefore output.
Since the IS curve is vertical, changes in the interest rate brought about by monetary policy would not have any impact on output. This implies that monetary policy, which operates through changes in interest rates, would be ineffective in influencing output in this particular scenario.
It's important to note that this assumption of investment not depending on the interest rate is generally unrealistic. In reality, the interest rate is one of the significant factors influencing investment decisions.