(Answered) Suppose that the government decided to control the prices

Management Studies

Suppose that the government decided to control the prices of most food items (think about the government imposing some price ceiling on the prices of all food items). Because the prices of food decreased significantly, the general price level decreased. How would this affect the LM curve?

Hint: this is an example of an exogenous shock to the price level... Now this change in the price will affect the LM curve, unlike the case where the price level adjusts in response to other macroeconomic shocks.

Recall the LM equation: M/P=L(Y,r) --- M=P.L(Y,r)

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