At the point when government decline the supply of money then its LM bend moves upward/left expanding financing costs decreases the utilization (consumption) which is better answer for balance out economy. This can be explained with the help of a diagram as well:
In the above given diagram AD is the aggregate demand whereas AS is the aggregate supply curve which intersect at equilibrium point e. Price and output are taken simultaneously on the Y and X axis respectively But when the curve AD shifts showing an increase in aggregate demand then the price rises to P’ from P whereby the level of quantity produced (Output) is increasing from Y to Y’ thus showing expansion in the economy by increase in the output.
In the above diagram Interest rates and Output are taken on the Y and X axis respectively. The IS curve intersects the LM curve at point e initially which is the equilibrium point with l as the interest rate and Y as the output. But when there is change in the rate of interest that is it rises from l to l’ then the IS curve shifts from IS to IS’ and then the equilibrium point shifts from e to e’ where it intersects the LM curve. With this the level of output increases as well from Y to Y’.
In the above diagram, Output and Price are taken on X-axis and Y-axis respectively. The AD curve represents the aggregate demand curve and AS depicts the Aggregate supply curve. Both the AD and AS curve intersects at point e that represents the equilibrium point. Point P represents the equilibrium price and Y as the equilibrium level of output produced by the economy. When the price increases from P to P’ then there occurs a shift in the aggregate demand (AD) curve to the right of the original demand curve and the new aggregate demand curve becomes AD’. As an outcome of this there is a shift in the level of equilibrium. The new equilibrium is now at point e’ that is formed as a result of the convergence of the aggregate supply curve (AS) and the new aggregate demand curve. Due to this, the output also increases in the economy from Y to Y'.
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