If the demand for money increases, what happens in the IS-LM framework?
A) The IS curve shifts right.
B) The LM curve shifts right.
C) The IS curve shifts left.
D) The LM curve shifts left.

Question

Quizplus · Accepted Answer

An increase in the demand for money means that people want to hold more money relative to other assets. This causes the price of holding money (i.e. interest rate) to increase, which shifts the LM curve to the left. The IS curve remains unchanged because the demand for goods and services is not affected by the increase in the demand for money. Therefore, the correct answer is D, the LM curve shifts left.

If the Demand for Money Increases, What Happens in the IS-LM