The aggregate demand curve may be derived from the IS-LM analysis by shifting
A)the IS curve as the price changes.
B)the real money supply and thus LM curve for each new price level.
C)both the LM and IS curves since the real money supply and real expenditures change when P changes.
D)the LM rightward when P increases to define Y.

Question

Quizplus · Accepted Answer

The IS-LM analysis depicts the intersection of the investment-savings (IS) and liquidity preference-money supply (LM) curves. The real money supply and thus the LM curve shift for each new price level as it is derived under the assumption of fixed price levels. Hence, to derive the aggregate demand curve, we need to shift the LM curve for each new price level, and thus the best choice is B.

The Aggregate Demand Curve May Be Derived from the IS-LM