Changes in the demand for money shifts the LM curve. But note that with a horizontal LM curve, LM cannot shift left or right. Therefore the Fed should adjust the money supply to hold interest rates constant, thereby stabilizing output.
Changes in the demand for money shifts the LM curve. But note that with a horizontal LM curve, LM cannot shift left or right. Therefore the Fed should adjust the money supply to hold interest rates constant, thereby stabilizing output.