If velocity is constant and equal to 2, a $10 billion shift of the LM curve to the left will be produced by a __________ in the money supply.

Question

Quizplus · Accepted Answer

A $10 billion shift of the LM curve to the left indicates a decrease in the money supply. Given that velocity (V) is constant and equal to 2, and using the equation of exchange MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real output, a decrease in M must be offset by a proportional change in either P, Y, or both to maintain the equality if V is constant. In this case, a $5 billion decrease in the money supply, when multiplied by the constant velocity of 2, results in a $10 billion decrease in the nominal value of transactions (MV), aligning with the conditions described for the shift of the LM curve.

If Velocity Is Constant and Equal to 2, a $10