Consider the level of money demand characterised by MD = a + bY - ci. What happens if parameter b increases, i.e. the transactional demand for money exogenously increases across the board?Group of answer choicesThis results in a shift of the IS curve downwards.This leads to no change on the IS-LM diagram.This results in a shift of the LM curve upwards.This results in a shift of the LM curve downwards.
Question
Consider the level of money demand characterised by MD = a + bY - ci. What happens if parameter b increases, i.e. the transactional demand for money exogenously increases across the board?Group of answer choicesThis results in a shift of the IS curve downwards.This leads to no change on the IS-LM diagram.This results in a shift of the LM curve upwards.This results in a shift of the LM curve downwards.
Solution
The equation given, MD = a + bY - ci, represents the demand for money, where:
- MD is the quantity of money demanded
- a is a constant
- b is the income elasticity of money demand
- Y is the income level
- c is the interest elasticity of money demand
- i is the interest rate
If parameter b increases, it means that the transactional demand for money increases. This means that for a given level of income, people want to hold more money.
In the IS-LM model, the LM curve represents the equilibrium in the money market, i.e., where money demand equals money supply. If the demand for money increases, the LM curve shifts upwards. This is because, at a given interest rate, people want to hold more money, so the interest rate has to increase to restore equilibrium in the money market.
Therefore, the correct answer is: This results in a shift of the LM curve upwards.
Similar Questions
Consider the IS/LM model where the LM is horizontal. Suppose that the central announces an increase in its target cash rate. Other things being constant, this would result inGroup of answer choicesa shift up in the LM curve and a reduction in investment expenditurean unchanged LM curve and lower level of outputan unchanged LM curve, since the yield curve is unchanged, and lower outputa shift up in the LM curve and a higher level of output.
The _____ curve shifts as a result of a change in the price level.IS*LM*investmentaggregate demand
In the IS-LM model with interest setting monetary policy and endogenous money, the LM curve is horizontal becauseGroup of answer choicesthe transactions demand for money adjusts to the speculative demand for money through the establishment of the rate of interestdemand for money adjusts to supply of money through the establishment of an equilibrium level of incomedemand for and supply of money brought into equilibrium through the establishment of rate of interestthe quantity of money adjusts to the demand for money for a given policy determined rate of interest
A higher price level will shift the LM curve:to the left.to the right.upward.downward.
An increase in the aggregate price level, P, will most likely have which of the following effects?Select one:A.a downward shift in the LM curveB.an upward shift in the LM curveC.a rightward shift in the IS curveD.a leftward shift in the IS curve
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