The Fed has announced that it plans to lower the rate of monetary growth from 10% per year to 2% per year.You would expect this announcement to directly
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 the Fed announces a plan to lower the rate of monetary growth, it effectively signals a tighter monetary policy in the future. This can lead to expectations of higher interest rates, which increases the demand for money as people and businesses try to hold more liquidity before rates go up. An increase in money demand, with no immediate change in the money supply, shifts the LM curve up and to the left, as it becomes more expensive (in terms of interest rates) to hold money.

The Fed Has Announced That It Plans to Lower the Rate