The LM curve represents a locus of points where the:government budget is balanced.goods and money markets are in equilibrium.money market is in equilibrium.goods market is in equilibrium.
Question
The LM curve represents a locus of points where the:government budget is balanced.goods and money markets are in equilibrium.money market is in equilibrium.goods market is in equilibrium.
Solution
The LM curve represents a locus of points where the money market is in equilibrium.
Here's a step-by-step explanation:
-
The LM curve is a component of the IS-LM model, which stands for Investment-Saving and Liquidity preference-Money supply. This model is used in macroeconomics to illustrate the relationship between interest rates and real output in the goods and services market and the money market.
-
The LM part of the IS-LM model represents the equilibrium in the money market. The money market is in equilibrium when the demand for money equals the supply of money.
-
The LM curve is drawn for a given quantity of money. If the interest rate is high, people will want to hold less money (because they can earn more by holding other assets), so the quantity of money demanded is low. Conversely, if the interest rate is low, people will want to hold more money, so the quantity of money demanded is high.
-
Therefore, the LM curve slopes upward: at higher levels of income, the interest rate must be higher to keep the money market in equilibrium.
So, the LM curve represents a locus of points where the money market is in equilibrium, not where the goods market is in equilibrium, the government budget is balanced, or the goods and money markets are both in equilibrium.
Similar Questions
LM Curve (Liquidity Preference-Money Supply Curve):The LM curve represents equilibrium in the money market, where the demand for money equals the supply of money.It shows all combinations of interest rates and levels of income where the money market is in equilibrium.The LM curve slopes upward, indicating the positive relationship between the interest rate and income. When income increases, the demand for money increases, pushing up interest rates.
The IS curve is the locus of (Y, r) points where the:government budget is in deficit.goods and the money market are in equilibrium.money market is in equilibrium.goods market is in equilibrium.
The intersection of the IS and LM curves determines the equilibrium:money supply and national income.inflation and interest rate.national income and interest rate.national income and inflation.
In the IS-LM model with interest setting monetary policy and endogenous money, the LM curve is horizontal becauseGroup of answer choicesthe transactions demand for money adjusts to the speculative demand for money through the establishment of the rate of interestdemand for money adjusts to supply of money through the establishment of an equilibrium level of incomedemand for and supply of money brought into equilibrium through the establishment of rate of interestthe quantity of money adjusts to the demand for money for a given policy determined rate of interest
The LM curve is upward sloping because a higher level of the money supply is needed to increase output
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.