Figure 13-3
-In the figure above, suppose that the Fed maintains a fixed real money supply and that commodity demand is also fixed. The range of shifts in the LM curve, LM1 to LM2 lead to

Question

Figure 13-3 
-In the figure above, suppose that the Fed maintains a fixed real money supply and that commodity demand is also fixed. The range of shifts in the LM curve, LM1 to LM2 lead to

Quizplus · Accepted Answer

When the LM curve shifts from LM1 to LM2, the interest rate decreases from i1 to i2 which causes an increase in investment and output. As the real money supply is fixed, the equilibrium output can only be stable within the range of B0 to B1. Beyond B1, the interest rate falls so low that it causes an increase in demand for money leading to an unstable equilibrium output. Therefore, the correct choice is D, a stable equilibrium output from B0 to B1.

Figure 13-3 -In the Figure Above, Suppose That the Fed Maintains a Fed