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Homework answers / question archive / In the ISLM framework, an expansionary monetary policy causes aggregate output to _____ and the interest rate to _____, everything else held constant
In the ISLM framework, an expansionary monetary policy causes aggregate output to _____ and the interest rate to _____, everything else held constant.
a) increase; increase,
b) increase; decrease,
c) decrease; decrease,
d) decrease; increase.
The correct option is b) increase; decrease.
Explanation:
The IS-LM model explains the connection between money and goods market. Changes in the money supply will affect the LM curve. Expansionary monetary policy will result in an increase in the money supply that will shift the LM curve to the right. LM curve is an upward sloping curve. A rightward shift in the LM curve increases the output level and decreases interest rate in the economy.
