Economics Q104

0. A decrease in the nominal money supply would most likely shift the:

  • Option : C
  • Explanation : The LM curve represents the combinations of income and the interest rate at which the demand for real money balances equals the supply. For a given price level, a decrease in the nominal money supply is also a decrease in the real money supply. To decrease the demand for real money balances, either the interest must rise or income must decrease. Therefore, at each level of the interest rate, income (= expenditure) must decrease—a leftward shift of the LM curve. Since the IS curve is downward sloping (higher income requires a lower interest rate), a leftward shift in the LM curve means that the IS and LM curves will intersect at a lower level of aggregate expenditure/income. This implies a lower level of aggregate expenditure at each price level—a leftward shift of the Aggregate Demand curve.
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