Suppose the intersection of the IS and LM curves is to the left of the FE line.What would most likely eliminate a disequilibrium among the asset,labor,and goods markets?
A)A rise in the price level, shifting the LM curve up and to the left
B)A fall in the price level, shifting the LM curve down and to the right
C)A rise in the price level, shifting the IS curve up and to the right
D)A fall in the price level, shifting the IS curve down and to the left

Question

Quizplus · Accepted Answer

If the intersection of the IS and LM curves is to the left of the FE line, it indicates an output level lower than the potential level. Therefore, there is excess supply in the goods market, which results in an increase in inventories, leading firms to reduce production and employment. This scenario implies a deficiency in aggregate demand, which can be eliminated by increasing aggregate demand. Since the intersection of the IS and LM curves is to the left of the FE line, monetary policies such as a shift in the LM curve may be more effective in stimulating economic activity. A fall in the price level, achieved through an expansionary monetary policy, would shift the LM curve down and to the right, increasing the money supply and lowering interest rates, which would boost investment and consumption, raising aggregate demand to the level of potential output.

Suppose the Intersection of the IS and LM Curves Is