Question

In the Keynesian model, suppose the Fed wants to keep output unchanged. If the IS curve shifts to the left, and the Fed acts to keep output unchanged, then:

Answer 1

Have an expansionary monetary policy (shift LM curve to the right)

Step-by-step explanation:

See the graph attached. If the IS curve shifts to the left, there will be a new IS curve- The IS'. If the Fed wants to keep the output level (Y) unchanged, then it has to shift the LM curve to the right, to LM', so that the Y point (output level) in which the IS matches the LM stays the same (Y*).

Shifting the LM curve to the right, it means to have an expansionary monetary policy, which means to expand the quantity of money in the economy. This is done, for example, by decreasing the discount rate or reducing the reserve ratio.