Figure 10.8 -Refer to Figure 10.8..Other things equal,an increase in expected inflation would best be represented by A) a movement from point A to point C. B) a movement from point A to point D. C) a shift from LM₁ to LM₂. D) a shift from LM₂ to LM₁.

Question

Quizplus · Accepted Answer

An increase in expected inflation would lead to an increase in nominal interest rates, which in turn would increase the demand for money and shift the LM curve upward and to the left from LM₁ to LM₂. Therefore, the correct choice is C, a shift from LM₁ to LM₂. movements from point A to point C or D would only represent changes in the equilibrium interest rates, while the shift of the LM curve represents a change in the monetary policy environment.

Figure 10.8 -Refer to Figure 10.8..Other Things Equal,an Increase in Expected Inflation