An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, ______ output and ______ interest rates.
A) increase; lower
B) increase; raise
C) lower; lower.
D) lower; raise

Question

Quizplus · Accepted Answer

According to the IS-LM framework, an increase in the demand for money will lead to a reduction in output and an increase in interest rates. This is because an increase in the demand for money will lead to a reduction in spending, which in turn will reduce output (via the multiplier effect). At the same time, the increase in demand for money will raise interest rates as people will be willing to pay more to hold their desired level of money balances. Hence, the correct answer is D.

An Increase in the Demand for Money, at Any Given