The LM curve illustrates that when income increases,the
A)price level must increase to clear the asset market.
B)real interest rate on nonmonetary assets must increase to clear the asset market.
C)price level must increase to clear the goods market.
D)real interest rate on nonmonetary assets must increase to clear the goods market.

Question

Quizplus · Accepted Answer

The LM curve shows the combinations of interest rates and income levels that equate the demand and supply of money. An increase in income will increase the demand for money, leading to an upward shift in the LM curve. To restore equilibrium in the money market, the interest rate must increase, which would reduce the demand for money. Thus, the real interest rate on nonmonetary assets must increase to clear the asset market. The price level is not directly related to the LM curve, and an increase in income does not necessarily require an increase in the price level to clear either the asset or goods market.

The LM Curve Illustrates That When Income Increases,the