If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will ______, shifting the ______ curve to the right and returning output to the natural level.
A) increase; IS
B) decrease; IS
C) increase; LM
D) decrease; LM

Question

Quizplus · Accepted Answer

In the long run, if income is below the natural level of output, prices will decrease, which increases real money supply, shifting the LM curve to the right, and returning output to the natural level.

If the Short-Run IS-LM Equilibrium Occurs at a Level of Income