Economics • Economic BasicsHard
In macroeconomic equilibrium analysis using the IS-LM framework, what is the graphical implication of a monetary expansion?
A. Shifts the IS curve outward to the right, lowering interest rates
B. Shifts the LM curve outward to the right, lowering interest rates and raising output✓ Correct Answer
C. Shifts the LM curve inward to the left, raising interest rates and lowering output
D. Leaves both curves entirely unaffected while altering only the price level
💡 Solution & Explanation
An increase in the money supply shifts the LM curve to the right, which creates excess liquidity in the financial market, drives down the interest rate, and stimulates investment and output, moving the economy along the IS curve to a new equilibrium. Other options incorrectly describe shifts in the IS curve or inward contractions of the LM schedule. The IS-LM model integrates goods and money markets to determine simultaneous equilibrium.
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