The appointment of a new "dovish" Fed chair increases expected inflation. Use the IS-LM model to predict the short-run effects on income, the interest rate, consumption, and investment. Explain what the Fed should do to keep income at its initial level. A graph may be helpful for your answer. An increase in expected inflation increases the demand for money, shifting the LM curve up. The interest rate rises while investment, income, and consumption all fall. If the Fed wants to keep income at its initial level, it must increase the money supply and counteract the initial shift of the LM curve. An increase in expected inflation reduces the demand for money, shifting the LM curve down. The interest rate falls while investment, income and consumption all rise. If the Fed wants to keep income at its initial level, it must decrease the money supply and counteract the initial shift of the LM curve. An increase in expected inflation reduces the demand for money, shifting the LM curve up. The interest rate falls while investment, income, and consumption all rise. If the Fed wants to keep income at its initial level, it must increase the money supply and counteract the initial shift of the LM curve. An increase in expected inflation reduces the de 1 for money, shifting the LM curve down. The interest rate, income, and consumption all fall while investment increases. If the Fed wants to keep income at its initial level, it must decrease the money supply and counteract the initial shift of the LM curve.