Question

QUESTION 25

1. In the IS-LM model, when M / P (real money supply) rises, in the new equilibrium, investment expenditure:

   	A.	is higher.
   	B.	is lower.
   	C.	stays the same.
   	D.	none of the above.

Answer 1

IS curve shows the negative relationship between the interest rate ( i) and output level ( Y). LM curve shows the positive relationship between the interest rate ( i) and output level ( Y) .E represents the equilibrium where both curve interesect each other . So if the money supply rises , LM curve will shift rightwards , causing lower interest rate and higher output .

Also investment and interest rate are negatively related to each other . So due to money supply rises , interest rate falls , and due to falls in interest rate Investment will rise as they are negatively related to each other .

Hence ( A ) part is a correct answer