Consider an initial IS-LM equilibrium in which the nominal money supply is 1000 and the price level is 1.0.As the price level falls to 0.5,then to 0.333,and then to 0.25,the effect on real balances means that AD
A)becomes flatter.
B)shifts upward by less and less.
C)shifts downward by less and less.
D)shifts downward by the same amount.
E)becomes upward-sloping at price levels below 1.0.

Question

Quizplus · Accepted Answer

As the price level falls, the real value of money (real balances) increases, which lowers interest rates and stimulates investment and consumption. This makes the aggregate demand (AD) curve flatter because a change in the price level has a larger impact on output and income.

Consider an Initial IS-LM Equilibrium in Which the Nominal Money