Suppose we have an initial IS-LM equilibrium at a certain price level.A rise in the price level puts ________ pressure on the interest rate as the money market re-equilibrates,which in turn causes commodity market equilibrium to occur at an output level ________ the initial one.
A)upward,above
B)upward,below
C)downward,above
D)downward,below

Question

Quizplus · Accepted Answer

A rise in the price level will increase the demand for money as people need more money to make transactions. This, in turn, will put upward pressure on the interest rate as people will be willing to pay more to hold onto their money. As the interest rate increases, investment spending will decrease, which will shift the IS curve upward and to the left. This means that commodity market equilibrium occurs at an output level below the initial one. Therefore, option B is the correct answer.

Suppose We Have an Initial IS-LM Equilibrium at a Certain