If the Fed's goal is to keep the interest rate fixed,a contractionary fiscal policy must be accompanied by ________ monetary policy that shifts the LM curve to the ________.
A)an expansionary,right
B)an expansionary,left
C)a contractionary,right
D)a contractionary,left

Question

Quizplus · Accepted Answer

If the Fed's goal is to keep the interest rate fixed, an expansionary fiscal policy would increase aggregate demand and shift the IS curve to the right, causing an increase in output and a rise in interest rates. To counteract this effect and keep the interest rate fixed, the Fed would need to implement a contractionary monetary policy, which would shift the LM curve to the left. Therefore, the correct answer is (D) - a contractionary fiscal policy must be accompanied by a contractionary monetary policy that shifts the LM curve to the left.

If the Fed's Goal Is to Keep the Interest Rate