Question

For a positively sloped LM curve, which of the following statements is CORRECT?

• A. A decrease in the price level will shift the LM curve to the left
• B. A lower nominal money supply will shift the LM curve to the right
• C. An increase in the price level will shift the LM curve to the right
• D. A higher nominal money supply will shift the LM curve to the right

Answer 1

The Correct Option is D

The question pertains to understanding the effects of changes in the nominal money supply and the price level on the position of the LM curve in macroeconomic analysis.

The LM curve represents the set of all combinations of interest rates and real GDP where the money market is in equilibrium. It is positively sloped, reflecting that higher levels of GDP require higher interest rates to maintain equilibrium in the money market.

To address the options, let's consider the impact of changes in nominal money supply and price levels:

1. A decrease in the price level will shift the LM curve to the left.
   This statement is incorrect. A decrease in the price level increases the real money supply (since real money = nominal money/price level), which shifts the LM curve to the right, not left.
2. A lower nominal money supply will shift the LM curve to the right.
   This statement is incorrect. A lower nominal money supply decreases the real money supply, shifting the LM curve to the left.
3. An increase in the price level will shift the LM curve to the right.
   This statement is incorrect. An increase in the price level decreases the real money supply, shifting the LM curve to the left.
4. A higher nominal money supply will shift the LM curve to the right.
   This is the correct statement. An increase in the nominal money supply increases the real money supply, causing the LM curve to shift to the right.

Therefore, the correct answer is that "A higher nominal money supply will shift the LM curve to the right."

Understanding these concepts is crucial for comprehending how monetary policy affects the economy. When the central bank increases the nominal money supply, it effectively puts more real money into the economy (if the price level is constant), leading to lower interest rates at each level of income, thus shifting the LM curve to the right, indicating lower interest rates for the same GDP level.