Figure 4-6

-In Figure 4-6 above,with IS₀ shifting to IS₁ against the upward-sloping LM curve,at point 1
A)there is an excess demand for money.
B)there is an excess supply of money.
C)the demand for output exceeds Y₁.
D)the demand for output is below Y₁.

Question

Figure 4-6
 
-In Figure 4-6 above,with IS₀ shifting to IS₁ against the upward-sloping LM curve,at point 1
A)there is an excess demand for money. 
B)there is an excess supply of money. 
C)the demand for output exceeds Y₁. 
D)the demand for output is below Y₁.

Quizplus · Accepted Answer

When IS shifts to the right, it creates an excess demand for money at the initial interest rate (represented by the intersection of the old IS and LM curves). This causes the interest rate to rise until the excess demand for money is eliminated, which occurs at the new intersection of IS₁ and LM. Therefore, at point 1, there is an excess demand for money.

Figure 4-6 -In Figure 4-6 Above,with IS₀ Shifting to IS₁ Against the to IS₁