In the Keynesian model,suppose the Fed sets a target for the money supply.If the IS curve shifts to the left,and the Fed wants to keep output unchanged,what should the Fed do?
A)reduce taxes.
B)reduce the money supply.
C)increase taxes.
D)increase the money supply.

Question

Quizplus · Accepted Answer

If the IS curve shifts to the left, it indicates a decrease in output. To keep output unchanged, the Fed should increase the money supply to shift the LM curve to the right. This will result in a decrease in interest rates and an increase in investment which will shift the IS curve back to its original position. Therefore, the Fed should increase the money supply.

In the Keynesian Model,suppose the Fed Sets a Target for the Money