A change that increases real money demand relative to the real money supply causes
A)the LM curve to shift down and to the right.
B)the LM curve to shift up and to the left.
C)the IS curve to shift down and to the left.
D)the IS curve to shift up and to the right.

Question

Quizplus · Accepted Answer

An increase in real money demand relative to the real money supply implies a higher interest rate is necessary to equate the two. This causes the LM curve to shift up and to the left as a higher interest rate leads to lower investment and hence a lower level of income and output, which in turn causes the IS curve to shift down and to the left.

A Change That Increases Real Money Demand Relative to the Real