Figure 13-3

-In Figure 13-3 above,suppose that the Fed maintains a fixed real money supply and that commodity demand is also fixed.The range of shifts in the LM curve,LM₁ to LM₂ lead to

Question

Figure 13-3
 
-In Figure 13-3 above,suppose that the Fed maintains a fixed real money supply and that commodity demand is also fixed.The range of shifts in the LM curve,LM₁ to LM₂ lead to

Quizplus · Accepted Answer

When the LM curve shifts from LM₁ to LM₂, output changes from C to B₁. However, this results in an unstable equilibrium because if we move further to the left (for example, due to a decrease in investment demand), output will jump to point A instead of stabilizing at a lower level. On the other hand, if the LM curve shifts from B₀ to B₁, output changes from C to B₁ but this results in a stable equilibrium because any shock (such as a decrease in investment demand) would result in output moving back towards B₁ rather than jumping to a different level. Therefore, the range of shifts from B₀ to B₁ lead to a stable equilibrium output.

Figure 13-3 -In Figure 13-3 Above,suppose That the Fed Maintains a Fixed