Suppose that IS and LM intersect at full-employment output. A leftward shift of IS will be followed by a __________ price level that shifts LM to the __________ in a return to full employment.

Question

Quizplus · Accepted Answer

A leftward shift of the IS curve indicates a decrease in investment or consumption, leading to lower output and income. This would typically result in lower demand for goods and services, putting downward pressure on prices. As prices fall, the real money supply (money supply adjusted for price level) increases because the value of money goes up when prices go down. This increase in the real money supply would shift the LM curve to the right, as more money is available to support economic activity at lower interest rates, helping the economy return to full employment.

Suppose That IS and LM Intersect at Full-Employment Output