Suppose that IS and LM intersect at full-employment output. A leftward shift of LM 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 LM curve indicates a decrease in the money supply or an increase in money demand, leading to higher interest rates and lower output. To return to full employment, the price level must fall, which increases the real money supply and shifts the LM curve back to the right.

Suppose That IS and LM Intersect at Full-Employment Output