A decrease in the price level, holding nominal money supply constant, will shift the LM curve:
A) upward and to the right.
B) downward and to the right.
C) downward and to the left.
D) upward and to the left.

Question

Quizplus · Accepted Answer

A decrease in the price level, while holding the nominal money supply constant, increases the real money supply. This makes more money available for investment and consumption at each interest rate, effectively lowering the interest rate for any given level of income. This is represented by a shift of the LM curve downward and to the right, indicating that a lower interest rate is now associated with any given level of income.

A Decrease in the Price Level, Holding Nominal Money Supply