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Effects of MS, MD, and the Price Index on the LM Function

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Explain briefly how a change to the following MS, MD, or P (ceteris paribus) would shift the LM function to the right. Include in your discussion whether the variable would have to increase or decrease to cause the rightward LM shift. Discuss which of these the FED exercises control over.

a. MS.
b. MD (money demand).
c. P (price index).

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Solution Summary

Several factors cause the LM function to shift. This solution discusses how money supply (MS), money demand (MD), and the price index (P) affect the LM function.

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LM Shift

Explain briefly how a change to the following MS, MD, or P (ceteris paribus) would shift the LM function to the right. Include in your discussion whether the variable would have to increase or decrease to cause the rightward LM shift. Discuss which of these the FED exercises control over.

a. MS.
b. MD (money demand).
c. P (price index).
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A. An increase in money supply shifts the LM curve to the right (see explanation below)

For the LM curve, a change in ...

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