Which of the following is true of the LM curve when the nomi

Which of the following is true of the LM curve when the nominal interest rate is on the vertical axis?

Select one:

a. A change in expected inflation will have no effect on the position of the LM curve.

b. A decrease in the expected inflation rate will make the LM curve shift down.

c. The LM curve becomes steeper.

d. A decrease in the expected inflation rate will make the LM curve shift up.

e. The LM curve becomes downward sloping.

Solution

Correct option is (a).

Position of IS and LM curves are based on the level of real interest rate, therefore IS-LM model is graphed by plotting real interest rate vertically (and real outut horizontally). If nominal interest rate is measured instead, a change in expected inflation does not affect nominal interest rate, so position of LM curve will not be affected.