Figure 7-1 -By referring to Figure 7-1,an increase in the money stock A)shifts the LM schedule to the right from LM₀ to LM₁. B)shifts the LM schedule to the left from LM₀ to LM₂. C)leaves the LM curve unchanged at LM₀. D)shifts neither the IS nor the LM schedule.

Question

Quizplus · Accepted Answer

Referring to Figure 7-1, an increase in the money stock shifts the LM schedule to the right, from LM₀ to LM₁. This is because an increase in the money stock leads to an increase in the supply of money, causing the interest rate to decrease. The decrease in the interest rate increases investment, causing an increase in output and thus an increase in equilibrium real GDP. The increase in equilibrium real GDP causes an increase in the demand for money, leading to a higher interest rate. The point where the LM curve intersects the IS curve moves to the right, indicating a higher level of equilibrium real GDP at a higher interest rate.

Figure 7-1 -By Referring to Figure 7-1,an Increase in the Money Stock