Suppose we have an initial equilibrium with curves IS₀ and LM₀.The price level then falls.At every point on LM₀ there is now an excess ________ real balances,which is eliminated at each income level by a ________ in the interest rate,meaning that the new LM curve is ________ LM₀.
A)demand for,fall,above
B)demand for,fall,below
C)demand for,rise,above
D)supply of,rise,above
E)supply of,fall,below

Question

Quizplus · Accepted Answer

When the price level falls, real money balances increase, leading to an excess supply of real balances. This causes the interest rate to fall at each income level, shifting the LM curve downwards, or below LM₀.

Suppose We Have an Initial Equilibrium with Curves IS₀ and LM₀.The