Answer to Question #274882 in Microeconomics for Ankit

Question

Suppose, there is a rise in money demand for every level of income and interest rate. How will this affect the LM and the aggregate demand curve, if at all? Explain.

Answer 1

Solution:

The increased demand for cash shifts the LM curve up. This happens because at any given level of income and money supply, the interest rate necessary to equilibrate the money market is higher. The upward shift in the LM curve lowers income and raises the interest rate, thus shifting the aggregate demand curve to the left.