In addition to depending on disposable income, suppose household consumption were also a function of the interest rate. In particular, assume that households consume more (i.e., save less) when the interest rate falls. Assume prices are fixed in the short run.
A) Explain how this situation would influence the shape of the IS and/or LM curves relative to the case in which consumption is not a function of the interest rate.
B) Now use IS and LM curves to illustrate how this situation would influence the short-run effectiveness of monetary policy.
C) What, if anything, would this modification do to the shape of the aggregate demand curve?