Under fixed exchange rates,when a central bank increases money supply,it first shifts the LM curve to the ______ and later shifts ______.
A) left; the LM curve to the right.
B) left; the IS curve to the right.
C) right; the LM curve to the left.
D) right; the IS curve to the right.

Question

Quizplus · Accepted Answer

Under fixed exchange rates, an increase in money supply by the central bank shifts the LM curve to the right, which leads to an increase in output and a decrease in interest rates. If the central bank wants to maintain the fixed exchange rate, it has to intervene in the foreign exchange market by buying up foreign currencies, which shifts the LM curve back to the left. Therefore, the correct answer is C.

Under Fixed Exchange Rates,when a Central Bank Increases Money Supply,it