Despite an expansionary monetary policy,an economy experiences a recession. Everything else held constant,the recession could occur in spite of the rightward shift of the LM curve if
A)consumer confidence decreases sharply.
B)there is an investment boom.
C)the money supply increases.
D)taxes are cut.

Question

Quizplus · Accepted Answer

Consumer confidence plays a significant role in determining the level of consumption, which is a major component of aggregate demand. If consumer confidence decreases sharply, it will lead to a decrease in consumption expenditure, leading to a decrease in aggregate demand and therefore, a recession. The rightward shift of the LM curve, resulting from an expansionary monetary policy, can only affect output and interest rates in the short run while the decrease in consumer confidence can have long-run effects on the economy.

Despite an Expansionary Monetary Policy,an Economy Experiences a Recession