Assume that the current demand for goods DOES depend on expectations in the IS-LM model.A monetary expansion in the current period will cause a rightward shift in the IS curve if
A)current and expected future real interest rates are positively related.
B)current and expected future real interest rates are negatively related.
C)current and expected future real interest rates are unrelated.
D)the central bank is expected to reverse any current movements in monetary policy in the future.
E) monetary policy cannot affect, directly or indirectly, the position of the IS curve in the current period.

Question

Quizplus · Accepted Answer

A monetary expansion in the current period will cause a rightward shift in the IS curve if current and expected future real interest rates are positively related. This is because a monetary expansion will lower the current real interest rate, which will lead to an increase in current investment and consumption. This increase in aggregate demand will shift the IS curve to the right.

Assume That the Current Demand for Goods DOES Depend on Expectations