If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will __, shifting the ____ curve to the right and returning output to the natural level.

Question

BlackTom AI · Accepted Answer

In this question we are linking short-run IS-LM dynamics with long-run price level adjustments and the subsequent shift of the money market curve.
Option A: increase; IS
This would imply that in the long run the price level rises, which would tend to reduce the real money stock and shift the LM curve left, not right. A higher price level does not fix a short-run deficiency of demand by moving output back toward natural level; rather, it tends to depress real balances and reduce spending power, which worsens the gap, so this option misstates both the direction of price movement and the resulting curve shift.
Option B: decrease; IS
Here the price level is said to fall, but the claim that the IS curve would move (instead of the LM curve) is incorrect. In the standard IS-LM framework, shifts of the IS curve are driven by changes in aggregate demand components (government policy, autonomous spending, expectations, etc.), while adjustments in the price level primarily affect the LM curve through real money balances. A long-run price drop actually shifts LM to the right, not IS, so this option misidentifies the responsible curve and the mechanism.
Option C: increase; LM
This option proposes a higher price level in the long run and a rightward shift of LM. A higher price level reduces real money balances, which would shift LM to the left (not right). Therefore, both halves of this statement are inconsistent with standard monetary transmission: the price level would not rise in this scenario, and LM would not move right in response to a higher price.
Option D: decrease; LM
This option states that in the long run the price level will fall when the short-run IS-LM equilibrium is below the natural level of output. A lower price level increases real money balances, which shifts the LM curve to the right. The rightward shift of LM raises the real money stock available for transactions, pushing income back toward its natural level and restoring equilibrium output in the long run. This matches the conventional adjustment mechanism: a deflationary pressure raises monetary ease and expands demand until output aligns with potential.

BU.220.610.51.FA25 M8 Final Comprehensive Exam - Multiple Choice Questions- Requires Respondus LockDown Browser

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will , shifting the __ curve to the right and returning output to the natural level.

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Similar Questions

If, in addition, 𝑅 𝑡 = 𝑟 ¯ , short run output [ Select ] .

The IS curve shifts when any of the following economic variables change except:

When the LM curve is drawn, the quantity that is held fixed is:

In the IS-LM model, a decrease in government purchases leads to a(n) in planned expenditures, a(n) in total income, a(n) in money demand, and a(n) in the equilibrium interest rate.

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply.

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BU.220.610.51.FA25 M8 Final Comprehensive Exam - Multiple Choice Questions- Requires Respondus LockDown Browser

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will __, shifting the ____ curve to the right and returning output to the natural level.

View Explanation

Log in for full answers

Similar Questions

If, in addition, 𝑅 𝑡 = 𝑟 ¯ , short run output [ Select ] .

The IS curve shifts when any of the following economic variables change except:

When the LM curve is drawn, the quantity that is held fixed is:

In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply.

An increase in the money supply shifts the __ curve to the right, and the aggregate demand curve ____.

Other things equal, a given change in money supply has a larger effect on demand the:

The tax decrease makes the interest rate ______ and investment ______ in this model.

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will , shifting the __ curve to the right and returning output to the natural level.

In the IS-LM model, a decrease in government purchases leads to a(n) in planned expenditures, a(n) in total income, a(n) in money demand, and a(n) in the equilibrium interest rate.

An increase in the money supply shifts the curve to the right, and the aggregate demand curve __.

The tax decrease makes the interest rate and investment in this model.