Consider an economy with flexible exchange rates. If there are high levels of inflation in the economy, then the appropriate monetary policy would be to ________ the money supply, which will cause the ______ curve to shift ________.
A) increase; the LM; left
B) decrease; the LM; right
C) decrease; the LM; left
D) increase; the IS; left

Question

Quizplus · Accepted Answer

If there are high levels of inflation in the economy, then the appropriate monetary policy would be to decrease the money supply. This will cause a contraction in output, hence causing the LM curve to shift leftward.

Consider an Economy with Flexible Exchange Rates