In a closed economy, an increase in the demand for money shifts the LM curve to the __________; other things equal, this will lead to __________ in national income.
A) right; an increase
B) right; a decrease
C) left; an increase
D) left; a decrease

Question

Quizplus · Accepted Answer

An increase in the demand for money leads to a leftward shift of the LM curve. This means that for a given level of income, the interest rate necessary to equate money demand with money supply is now higher. This in turn reduces investment and consumption expenditure, decreasing national income. Hence, the correct choice is D, leftward shift of the LM curve and a decrease in national income.

In a Closed Economy, an Increase in the Demand for Money