As the LM curve becomes flatter, an unexpected increase in consumer confidence:
A) will cause a relatively small increase in output and relatively small increase in the interest rate.
B) is more likely to cause stock prices to fall.
C) is more likely to keep stock prices constant.
D) is more likely to cause stock prices to rise.
E) will cause a relatively large increase in output and relatively large increase in the interest rate.

Question

Quizplus · Accepted Answer

When the LM curve is flatter, it indicates that the money market is more sensitive to changes in income and less sensitive to changes in the interest rate. An unexpected increase in consumer confidence typically leads to higher spending and investment, which boosts output. This increase in economic activity often leads to higher stock prices, as companies are expected to perform better. The flatter LM curve suggests that the resulting increase in interest rates will be smaller, mitigating any negative impact on stock prices from higher rates. Thus, an increase in consumer confidence is more likely to cause stock prices to rise in this scenario.

As the LM Curve Becomes Flatter, an Unexpected Increase in Consumer