Question

Use the IS-LM-FE model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the price level.

C. An influx of working age immigrants increases labor supply (ignore any other possible effects of the increased population

( my question is this, why should price level decrease? it says that for LM curve to shift down, price level should fall. but I wonder what makes price level go down? LM curve shift down as a result of decreases in price level. but what leads price level to decrease? im struggling with this so .please provide sufficent reason for it thanks )

Answer 1

The LM curve will shift down when the money supply increase, the new equilibrium will be at a higher money supply and lower interest rate.

LM curve will also shift down when the price level falls because a decrease in the price level will increase the real supply of money. For example, a good was available for $100 now it is available for just $50, rest $50 will increase the money supply or will be equivalent to an increased money supply.

An increased labor supply will decrease the wages and with lower wage the firm will be able to supply more at a the same price. That will increases the supply and shift the new equilibrium to the lower price and higher quantity.