Looking at the macroeconomic statistics for Friedmanland,you discover that at the beginning of the year,the national money supply was equal to $400 million and by the end of the year it was equal to $420 million.You also found out that the inflation rate in Friedmanland was 7%.In this case,you would expect the LM curve to
A)shift up and to the left as the real money supply falls.
B)shift up and to the left as the real money supply rises.
C)shift down and to the right as the real money supply falls.
D)shift down and to the right as the real money supply rises.

Question

Quizplus · Accepted Answer

With an increase in the money supply, the LM curve would normally shift to the right, indicating that interest rates would fall. However, since the inflation rate was 7%, the real money supply actually decreased from $373 million at the beginning of the year to $392.52 million at the end of the year (420/1.07), causing the LM curve to shift up and to the left. This is because a decrease in the real money supply would cause interest rates to rise, reducing investment and output.

Looking at the Macroeconomic Statistics for Friedmanland,you Discover That at the Beginning