A decrease in the price level shifts the curve to the right, and the aggregate demand curve<\/p>\n\n\n\n
a. IS; shifts to the right
b. IS; does not shift
c. LM; shifts to the right
d. LM; does not shift<\/p>\n\n\n\n
The Correct Answer and Explanation is:<\/mark><\/strong><\/p>\n\n\n\n Correct Answer: c. LM; shifts to the right<\/strong><\/p>\n\n\n\n To understand this question, it’s important to review how price level changes affect the IS-LM model<\/strong>, which is a fundamental model in macroeconomics used to determine equilibrium in the goods and money markets.<\/p>\n\n\n\n The IS curve<\/strong> represents equilibrium in the goods market<\/strong>, where investment (I) equals savings (S). The IS curve shows combinations of interest rates and output (GDP) where the goods market is in balance. It is not directly affected by changes in the price level<\/strong>, since it\u2019s based on real spending and investment decisions.<\/p>\n\n\n\n The LM curve<\/strong> represents equilibrium in the money market<\/strong>, where money demand equals money supply. It is derived using the real money supply (nominal money supply divided by the price level). This curve shows combinations of interest rates and output at which the money market is in balance.<\/p>\n\n\n\n When the price level falls<\/strong>, the real money supply increases<\/strong> because:<\/p>\n\n\n\n $$ As the denominator (price level) decreases, the real money supply increases. This effectively increases the amount of money available in real terms in the economy.<\/p>\n\n\n\n With more real money available<\/strong>, the interest rate falls<\/strong> (since there\u2019s less pressure on borrowing), which stimulates investment<\/strong> and raises aggregate demand<\/strong>. This shifts the LM curve to the right<\/strong>, showing that at every level of output, the interest rate can be lower due to the increased real money balances.<\/p>\n\n\n\n A decrease in the price level increases the real money supply, lowers interest rates, and shifts the LM curve to the right<\/strong>. Thus, option c<\/strong> is the correct choice.<\/p>\n","protected":false},"excerpt":{"rendered":" A decrease in the price level shifts the curve to the right, and the aggregate demand curve a. IS; shifts to the rightb. IS; does not shiftc. LM; shifts to the rightd. LM; does not shift The Correct Answer and Explanation is: Correct Answer: c. LM; shifts to the right Explanation (300+ words): To understand […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-213653","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/213653","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=213653"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/213653\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=213653"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=213653"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=213653"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\n\n\n\nExplanation (300+ words):<\/strong><\/h3>\n\n\n\n
The IS Curve:<\/strong><\/h4>\n\n\n\n
The LM Curve:<\/strong><\/h4>\n\n\n\n
\n\n\n\nImpact of a Decrease in the Price Level:<\/strong><\/h3>\n\n\n\n
\\text{Real Money Supply} = \\frac{\\text{Nominal Money Supply}}{\\text{Price Level}}
$$<\/p>\n\n\n\n
\n\n\n\nWhy Not the Other Options?<\/strong><\/h3>\n\n\n\n
\n
\n\n\n\nConclusion:<\/strong><\/h3>\n\n\n\n