If the short-run IS-LM equilibrium occurs at a level of income above the natural level of output, in the long run the ______ will ______ in order to return output to the natural level.
A) price level; increase
B) interest rate; decrease
C) money supply; increase
D) consumption function; decrease

Question

Quizplus · Accepted Answer

If the short-run IS-LM equilibrium occurs at a level of income above the natural level of output, it implies that there is an excessive demand for goods and services in the economy, pushing up the price level. In the long run, the price level will increase further, reducing the real money supply and shifting the LM curve upward until it intersects the IS curve at the natural level of output.

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