Starting from equilibrium in the ISLM framework, a decrease in money demand results in

Question

Quizplus · Accepted Answer

In the ISLM model, a decrease in money demand means that people want to hold less money for transactions and precautionary motives. As a result, they will want to use the excess funds to buy goods and services or invest. This leads to an increase in the demand for goods and services, which generates an upward shift in the IS curve. Simultaneously, the excess funds will push the interest rate down, reducing the return on money holdings until the desired level of money demand is achieved. The downward pressure on the interest rate generates a rightward shift in the LM curve. The new equilibrium occurs at a higher level of output (income) and a lower interest rate, which supports choice B as the correct answer.

Starting from Equilibrium in the ISLM Framework, a Decrease in Money