The money demand curve will shift to the right and the demand for bonds will shift to the left. The resulting higher interest rate will lead to a lower quantity of investment. Also, higher interest rates will lead to a higher exchange rate and depress net exports. Thus, the aggregate demand curve will shift.
Macroeconomics Classical IS-LM Model Demand exceeds product. Product cannot rise, as the economy is already at full employment. Hence the excess demand for goods causes prices to rise. The price rise continues until prices have increased by 10%. As P rises, real money balances M=P fall. The LM curve shifts.

Lower Real Money Balances Shift Lm Curve Calculator
Lower Real Money Balances Shift Lm Curve
Lower Real Money Balances Shift Lm Curve Chart

And real money balances. A) An increase in the money supply. An increase in the money supply shifts the LM curve to the right in the short run. This moves the economy from point A to point B in the figure: the interest rate falls from r1 to r2, and output rises from Y to Y2. The increase in output occurs because the lower interest rate stimulates investment, which increases output. Since the intercept of the LM curve contains the money supply (M S 0) any time money supply increases (decreases) the intercept will shift up (down) and the LM curve will shift up (down). 9.17 shows the effect of an exogenous increase in money supply on the LM curve. In part (a), the money market is in equilibrium at point E.

22.1 Shifting Curves: Causes and Effects

Learning Objective

What causes the LM and IS curves to shift and why?

Policymakers can use the IS-LM model developed inChapter 21 'IS-LM'to help them decide between two major types of policy responses, fiscal (or government expenditure and tax) or monetary (interest rates and money). As you probably noticed when playing around with the IS and LM curves at the end of the previous chapter, their relative positions matter quite a bit for interest rates and aggregate output. Time to investigate this matter further.

The LM curve, the equilibrium points in the market for money, shifts for two reasons: changes in money demand and changes in the money supply. If the money supply increases (decreases), ceteris paribus, the interest rate is lower (higher) at each level of Y, or in other words, the LM curve shifts right (left). That is because at any given level of output Y, more money (less money) means a lower (higher) interest rate. (Remember, the price level doesn’t change in this model.) To see this, look at Figure 22.1 'Effect of money on interest rates when output is constant'.

Figure 22.1 Effect of money on interest rates when output is constant

An increase in money demand due to a change in expectations, preferences, or transactions costs that make people want to hold more money at each interest rate will have the opposite effect. The money demand curve will shift to the right and the demand for bonds will shift to the left. What happens if the consumer hold greater real money balances. While you hold it, money does not keep you warm, entertain you, or provide any other benefit. Economists identify two reasons why people will demand money balances, or desire to hold a certain stock of money even if there is no intrinsic value for the money balances they hold. 3.2 Transactions Motive for Holding Money. When you carry money in your purse or wallet to buy a movie ticket or maintain a checking account balance so you can purchase groceries later in the month, you are holding the money as part of your transactions demand for money. The money people hold for contingencies represents their precautionary demand for money. Money held for precautionary purposes may include checking account balances. These real money balances, individuals have been re-stricting their spending, and will continue to do so in an attempt to rebuild the amount of “real” money they hold. Some have suggested that this view implies that monetary policy should be directed toward in-creasing the rate of. At the end of that day, the consumer has an account balance of negative $10. The institution may not assess an overdraft fee for the debit card transaction. On March 3, the institution pays a check transaction of $100 and charges an overdraft fee of $20. At the end of that day, the consumer has an account balance of negative $130.

An autonomous change in money demand (that is, a change not related to the price level, aggregate output, or i) will also affect the LM curve. Say that stocks get riskier or the transaction costs of trading bonds increases. The theory of asset demand tells us that the demand for money will increase (shift right), thus increasing i. Interest rates could also decrease if money demand shifted left because stock returns increased or bonds became less risky. To see this, examine Figure 22.2 'Effect of an autonomous change in money demand when output is constant'. An increase in autonomous money demand will shift the LM curve left, with higher interest rates at each Y; a decrease will shift it right, with lower interest rates at each Y.

Figure 22.2 Effect of an autonomous change in money demand when output is constant

The IS curve, by contrast, shifts whenever an autonomous (unrelated to Y or i) change occurs in C, I, G, T, or NX. Following the discussion of Keynesian cross diagrams inChapter 21 'IS-LM', when C, I, G, or NX increases (decreases), the IS curve shifts right (left). When T increases (decreases), all else constant, the IS curve shifts left (right) because taxes effectively decrease consumption. Again, these are changes that are not related to output or interest rates, which merely indicate movements along the IS curve. The discovery of new caches of natural resources (which will increase I), changes in consumer preferences (at home or abroad, which will affect NX), and numerous other “shocks,” positive and negative, will change output at each interest rate, or in other words shift the entire IS curve.

We can now see how government policies can affect output. As noted above, in the short run, an increase in the money supply will shift the LM curve to the right, thereby lowering interest rates and increasing output. Decreasing the MS would have precisely the opposite effect. Fiscal stimulus, that is, decreasing taxes (T) or increasing government expenditures (G), will also increase output but, unlike monetary stimulus (increasing MS), will increase the interest rate. That is because it works by shifting the IS curve upward rather than shifting the LM curve. Of course, if T increases, the IS curve will shift left, decreasing interest rates but also aggregate output. This is part of the reason why people get hot under the collar about taxes.See, for example, www.nypost.com/p/news/opinion/opedcolumnists /soaking_the_rich_AW6hrJYHjtRd0Jgai5Fx1O (Of course, individual considerations are paramount!)www.politicususa.com/en/polls-taxes-deficit. Note that the people supporting tax increases typically support raising other people’s taxes: “The poll also found wide support for increasing taxes, as 67% said the more high earners income should be subject to being taxed for Social Security, and 66% support raising taxes on incomes over $250,000, and 62% support closing corporate tax loopholes.”

Stop and Think Box

During financial panics, economic agents complain of high interest rates and declining economic output. Use the IS-LM model to describe why panics have those effects.

Lower Real Money Balances Shift Lm Curve

The LM curve will shift left during panics, raising interest rates and decreasing output, because demand for money increases as economic agents scramble to get liquid in the face of the declining and volatile prices of other assets, particularly financial securities with positive default risk.

Figure 22.3 'Predicted effects of changes in major macroeconomic variables'summarizes.

Figure 22.3 Predicted effects of changes in major macroeconomic variables

Stop and Think Box

Describe Hamilton’s Law (née Bagehot’s Law) in terms of the IS-LM model. Hint: Hamilton and Bagehot argued that, during a financial panic, the lender of last resort needs to increase the money supply by lending to all comers who present what would be

Lower Real Money Balances Shift Lm Curve