2016 · Q112
How does an expansionary monetary policy affect the rate of interest and level of income?
Indian EconomyBanking and RBI
- ARaises the level of income but lowers the rate of interest
- BRaises the rate of interest but lowers the level of income
- CRaises both, rate of interest and the level of income
- DLowers both, the rate of interest and the level of income.
Explanation
In the IS–LM framework, expansionary monetary policy shifts the LM curve right: the interest rate falls and the equilibrium level of income rises. Hence (A).