In the IS-LM model, starting with no expected inflation, if expected inflation becomes negative, then the:
A) IS curve shifts leftward.
B) IS curve shifts rightward.
C) LM curve shifts leftward.
D) LM curve shifts rightward.

Question

Quizplus · Accepted Answer

When expected inflation becomes negative, it typically leads to an increase in the real interest rate (since nominal interest rates do not adjust downward as quickly), which reduces investment and consumption. This decrease in aggregate demand causes the IS curve to shift leftward.

In the IS-LM Model, Starting with No Expected Inflation, If