If the expected rate of inflation decreases, the risk premium increases, or the term premium increases,

Question

Quizplus · Accepted Answer

The LM curve will shift to the left because a decrease in the expected rate of inflation, an increase in the risk premium, or an increase in the term premium would all lead to higher real interest rates, reducing investment and income at any given level of interest rates, which is represented by a leftward shift of the LM curve.

If the Expected Rate of Inflation Decreases, the Risk Premium