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.

d. The introduction of automated teller machines reduces the demand for money.

(answer says that eventually, price level increases due to an increase in the usage of ATMs thus, shifting LM curve to the left and up )

My question is this, what is the relationship usage of ATM with price level? how does it increase the price level?)

Answer 1

An Automated Teller Machine is a system that enables the consumers to perform financial transactions such as cash withdrawals, deposits, etc., at any time and without the need to go to the bank every now and then. This means that liquid cash as readily available as and when needed and there is no hold it. This reduces the demand for holding liquid money. This shifts the LM curve to the right. When output, price and money supply, are given, a leftward shift leads to lower interest rates. Investment increases and national income increase. Thus, in the long run, the price level increases in response to an increase in expenditures.