If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will __, shifting the ____ curve to the right and returning output to the natural level.

Question

BlackTom AI · Accepted Answer

In this question we are linking short-run IS-LM dynamics with long-run price level adjustments and the subsequent shift of the money market curve.
Option A: increase; IS
This would imply that in the long run the price level rises, which would tend to reduce the real money stock and shift the LM curve left, not right. A higher price level does not fix a short-run deficiency of demand by moving output back toward natural level; rather, it tends to depress real balances and reduce spending power, which worsens the gap, so this option misstates both the direction of price movement and the resulting curve shift.
Option B: decrease; IS
Here the price level is said to fall, but the claim that the IS curve would move (instead of the LM curve) is incorrect. In the standard IS-LM framework, shifts of the IS curve are driven by changes in aggregate demand components (government policy, autonomous spending, expectations, etc.), while adjustments in the price level primarily affect the LM curve through real money balances. A long-run price drop actually shifts LM to the right, not IS, so this option misidentifies the responsible curve and the mechanism.
Option C: increase; LM
This option proposes a higher price level in the long run and a rightward shift of LM. A higher price level reduces real money balances, which would shift LM to the left (not right). Therefore, both halves of this statement are inconsistent with standard monetary transmission: the price level would not rise in this scenario, and LM would not move right in response to a higher price.
Option D: decrease; LM
This option states that in the long run the price level will fall when the short-run IS-LM equilibrium is below the natural level of output. A lower price level increases real money balances, which shifts the LM curve to the right. The rightward shift of LM raises the real money stock available for transactions, pushing income back toward its natural level and restoring equilibrium output in the long run. This matches the conventional adjustment mechanism: a deflationary pressure raises monetary ease and expands demand until output aligns with potential.

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will , shifting the __ curve to the right and returning output to the natural level.单项选择题

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If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will __, shifting the ____ curve to the right and returning output to the natural level.单项选择题