Use the following to answer questions : Exhibit: IS*-LM* and AD -(Exhibit: IS*-LM* and AD) A small open economy with a floating exchange rate is initially in equilibrium at A with $I S _ { 1 } ^ { * }$ $L M _ { 1 } ^ { * } .$ Holding all else constant, if the domestic price level increases, then the _____ curve will shift to _____. A) LM₁*; $L M _ { 2 } ^ { * }$ B) LM₁*; $L M _ { 3 } ^ { * }$ C) IS₁*; $I S _ { 2 } ^ { * * }$ D) IS₁*; $I S _ { 3 } ^ { * }$

Question

Quizplus · Accepted Answer

An increase in the domestic price level will cause the LM curve to shift up and to the left, as the higher prices will increase the demand for money, pushing up interest rates. This will lead to a decrease in investment spending and a contraction of output, shifting the IS curve to the left. The intersection of the new IS and LM curves will be at point B with the new equilibrium at $L M _ { 3 } ^ { * }$.

Use the Following to Answer Questions : Exhibit: IS*-LM* and AD

Use the Following to Answer Questions :
Exhibit: IS-LM and AD