A change that increases real money demand relative to the real money supply causes
A)the LM curve to shift down.
B)the LM curve to shift up.
C)the IS curve to shift down.
D)the IS curve to shift up.

Question

Quizplus · Accepted Answer

When real money demand increases relative to the real money supply, there is a higher demand for money balances, which leads to an increase in the equilibrium interest rate. This causes a contraction in investment and consumption, which results in a downward shift of the LM curve. Therefore, the correct choice is B, as the LM curve shifts up.

A Change That Increases Real Money Demand Relative to the Real