In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______.
A) rises; falls
B) rises; rises
C) falls; rises
D) falls; falls

Question

Quizplus · Accepted Answer

When M remains constant but P rises, the real money supply (M/P) falls. In the short run, this leads to a decrease in money demand, causing the interest rate to rise. As the interest rate rises, investment and consumption fall, leading to a decrease in output. Therefore, in the usual case, the interest rate rises and output falls.

In the IS-LM Model When M Remains Constant but P