Suppose individuals expect that interest rates will fall in the future. Also assume that the RBA wants to prevent any change in current output. Given this goal of the RBA, the RBA should implement a policy in the current period that:
A) shifts the IS curve leftward.
B) shifts the IS curve leftward and the LM curve upward.
C) shifts the LM curve downward.
D) shifts the IS curve rightward.
E) shifts the LM curve upward.

Question

Quizplus · Accepted Answer

The RBA wants to prevent any change in current output. If individuals expect that interest rates will fall in the future, they will increase their current spending. This will shift the IS curve to the right. To offset this, the RBA should shift the LM curve upward, which will increase interest rates and reduce current spending.

Suppose Individuals Expect That Interest Rates Will Fall in the Future