In the Keynesian theory,an exogenous decrease in the demand for money shifts
A)the LM curve to the right.
B)the LM curve to the left.
C)the IS curve to the right.
D)the IS curve to the left.
E)neither the IS or LM curves.

Question

Quizplus · Accepted Answer

In the Keynesian theory, an exogenous decrease in the demand for money results in an increase in investment and consumption. This upward pressure on goods and services demand shifts the IS curve to the right. However, the decrease in money demand also implies a higher money supply, which lowers interest rates, thereby increasing investment and output. This effect shifts the LM curve to the right. As a result of both effects, the LM curve shifts to the right and the IS curve to the right, but the former shift is smaller than the latter, resulting in a net leftward shift of the LM curve- hence option B.

In the Keynesian Theory,an Exogenous Decrease in the Demand for Money