What is the slope of LM curve LM?
A lower bond price is equivalent to a higher interest rate, so the interest rate rises. Thus market forces do push the interest rate up toward equilibrium. The LM curve is upward sloping: given the money supply and the bond supply, an increase in the national income and product raises the interest rate.
Why LM curve has positive slope?
The LM curve has a positive slope because as income increases, money demand increases and bond demand decreases for a given interest rate. Above (below) the IS there is excess supply (demand) in the goods market. For a given Y, the interest rate is higher (lower) than required for Y + Z.
Where does LM curve slope?
The LM curve slopes upward because higher levels of income (GDP) induce increased demand to hold money balances for transactions, which requires a higher interest rate to keep money supply and liquidity demand in equilibrium.
Which of the following is the slope of LM curve?
The slope of the LM curve is the coefficient of Y, k over h, or the income sensitivity of demand for real money over the interest sensitivity of demand for real money. This ratio is important for monetary policy.
How is the slope of the LM curve defined?
Equilibrium is really just a fancy term for ‘balance.’ Demand for money is defined by the equation L = kY – hi, where L is the demand for inflation-adjusted money; k is income sensitivity of demand; Y is income; h is interest sensitivity of demand; and i is the interest rate. These factors affect the slope of the LM curve.
What does the LM curve tell us about money?
The LM curve tells what the various rates of interest will be (given the quantity of money and the family of demand curves for money) at different levels of income. But the money demand curve or what Keynes calls the liquidity preference curve alone rises.
What causes a downward shift in the LM curve?
To restore money market equilibrium at the initial level of income, the interest rate has to decline which means a downward shift of the LM curve. Another way of adjustment in the money market is to change the level of income.
When is the LM curve is perfectly elastic?
If in fact there is a minimum expected level of real interest rates where the asset demand for real money balances is perfectly elastic with respect to the market real rate of interest, the LM curve also would be perfectly elastic in this region.