If the Fed decreases money supply,
A) the IS curve will shift to the right.
B) the IS curve will shift to the left.
C) the LM curve will shift to the right.
D) the LM curve will shift to the left.

Question

Quizplus · Accepted Answer

When the Fed decreases money supply, it becomes more expensive for banks to borrow money from the Fed, which in turn causes interest rates to increase. This causes a decrease in investment and consumption, shifting the IS curve to the left. Additionally, with higher interest rates, people are less willing to hold money, which causes a decrease in the demand for money and a leftward shift of the LM curve. Therefore, the correct choice is D as the LM curve will shift to the left.

If the Fed Decreases Money Supply