Question

Consider the following statements: A. IS curve shifts to right when government's expenditure rises, B. LM Curve shifts to left when money supply falls, C. Interactions of IS-LM curve determines equilibrium of interest rate and income, D. A rise in price level shift LM curve to left, E. Liquidity trap makes LM curve vertical.

• A. A, B, C, D Only
• B. A, B, D, E Only
• C. A, B, C, E Only
• D. B, C, D, E Only

Hint:

Liquidity trap makes the LM curve horizontal because interest rate is very low and people prefer holding money.

Answer 1

The Correct Option is A

Concept: IS-LM model explains equilibrium in goods market and money market.

Step 1: Check statement A.
Increase in government expenditure increases aggregate demand and shifts IS curve right. \[ A = \text{Correct} \]

Step 2: Check statement B.
Fall in money supply shifts LM curve left because less money is available. \[ B = \text{Correct} \]

Step 3: Check statement C.
Intersection of IS and LM determines equilibrium income and interest rate. \[ C = \text{Correct} \]

Step 4: Check statement D.
Rise in price level reduces real money supply and shifts LM curve left. \[ D = \text{Correct} \]

Step 5: Check statement E.
Liquidity trap makes LM curve horizontal, not vertical. \[ E = \text{Incorrect} \] Therefore, correct statements are: \[ A, B, C, D \]