Banks decide to raise the interest rate they pay on checking accounts from 1% to 2%.This action would
A)increase money demand, shifting the LM curve up and to the left.
B)increase money demand, shifting the LM curve down and to the right.
C)decrease money demand, shifting the LM curve up and to the left.
D)decrease money demand, shifting the LM curve down and to the right.

Question

Quizplus · Accepted Answer

When banks raise the interest rate paid on checking accounts, it becomes more attractive for people to hold their money in those accounts. This raises the demand for money and causes an increase in the interest rate in the short run. In the IS-LM model, this would result in a shift of the LM curve up and to the left.

Banks Decide to Raise the Interest Rate They Pay on Checking