Everything else held constant,if aggregate output is to the ________ of the LM curve,then there is an excess demand of money which will cause the interest rate to ________.
A)right;fall
B)right;rise
C)left;fall
D)left;rise

Question

Quizplus · Accepted Answer

According to the liquidity preference theory of interest rate determination, if aggregate output is to the right of the LM curve, then the equilibrium interest rate is lower than the prevailing interest rate. This implies that there will be excess demand for money, which will cause people to sell their securities to buy money in order to satisfy their demand for money. As a result, the equilibrium interest rate will rise until the excess demand for money is eliminated. Therefore, the correct answer is B) right; rise.

Everything Else Held Constant,if Aggregate Output Is to the ________