Question

According to the IS-LM model, if the central bank increases money supply, then the rate of interest will ........... and the income will ..............

• A. fall, rise
• B. rise, fall
• C. rise, rise
• D. fall, fall

Hint:

In the IS-LM model, an increase in money supply leads to a decrease in interest rates and an increase in income due to greater investment.

Answer 1

The Correct Option is A

Step 1: Understand the IS-LM model.
The IS-LM model is a macroeconomic model that shows the relationship between interest rates (I) and output (Y) in the goods market (IS curve) and the money market (LM curve). The LM curve represents equilibrium in the money market, where the demand for money equals the supply.
Step 2: Effect of an increase in money supply.
When the central bank increases the money supply, it shifts the LM curve to the right, leading to a decrease in interest rates. Lower interest rates make investment more attractive, leading to an increase in income (output).
Thus, when the central bank increases the money supply, the interest rate falls and income rises.
Final Answer: \[ \boxed{\text{fall, rise}} \]