In the IS-LM model, if investor sentiments deteriorate, then, in order to prevent a recession, money supply should:
A)increase.
B)decline.
C)remain constant.
D)fluctuate.

Question

Quizplus · Accepted Answer

In the IS-LM model, a decrease in investor sentiments leads to a decrease in investment demand, which shifts the IS curve to the left. In order to prevent a recessionary gap, the LM curve must also shift to the right. This is achieved by an increase in the money supply, which lowers interest rates and boosts investment and consumption spending. Therefore, the correct answer is A, increase in the money supply.

In the IS-LM Model, If Investor Sentiments Deteriorate, Then, in Order