1. shifts both IS and LM permanently to the left.
2. causes domestic residents to reduce their holdings of non-monetary assets.
3. leaves the LM curve unaffected.
4. causes Π to increase and Q to fall.
Choose the option above that is correct.
Option 4 is the correct one. Equilibrium is determined by the intersection of the LM curve with the ZZ line. An exogenous increase in the nominal money supply will shift LM to the right. People will try to unload their excess money holdings by purchasing non-monetary assets abroad. This will create an excess supply of domestic currency and demand for foreign currency on the foreign exchange market, causing the domestic currency to devalue (Π to rise). Since P is fixed, the real exchange rate will fall. Income will have to increase sufficiently to get the public to hold the higher stock of nominal money balances. That will occur when the IS curve passes through the intersection of LM and ZZ.