The monetary transmission mechanism in the IS-LM model is a process whereby an increase in the money supply increases the demand for goods and services:
A) directly.
B) by lowering the interest rate so that investment spending increases.
C) by raising the interest rate so that investment spending increases.
D) by increasing government spending on goods and services.

Question

Quizplus · Accepted Answer

According to the IS-LM model, an increase in the money supply will shift the LM curve to the right, which lowers the interest rate. This in turn stimulates investment spending, which increases the demand for goods and services through the multiplier effect. Therefore, the correct choice is B, as the increase in the money supply indirectly affects the demand for goods and services by lowering the interest rate and stimulating investment spending.

The Monetary Transmission Mechanism in the IS-LM Model Is a Process