1. leads to a movement upward and to the right along the LM curve and upward to the left along the IS curve.
2. will cause the LM curve to shift to the right and the IS curve to shift to the left.
3. will lead to a movement upward and either to the left or the right along the IS and LM curves depending on where they cross.
4. will do none of the above.
Choose the option above that is correct.
The right choice is option 1. The LM curve is positively sloped with the real interest rate on the vertical axis and real output, income and employment on the horizontal axis. The IS curve is negatively sloped with the same variables on the two axes. The curves shift only when variables that are not on the axes change. Option 3. confuses the slopes of the curves with the condition of equilibrium.