The LM Curve Money and Money Demand Varies as Total Income

The LM Curve:

If the money stock is stable, then the truth that demand for money depends on real GDP Y means that the equilibrium nominal interest rate varies whenever real GDP Y varies. At every possible level of total income Y, there is a dissimilar curve showing money demand as a function of the nominal interest rate as. With a fixed money supply every of these money demand curves produces a different equilibrium nominal interest rate. If real GDP Y rises as well as the money supply Ms doesn’t, the nominal interest rate must increase too if the money market is to remain in equilibrium. With higher incomes households as well as businesses want to hold more money. However if the money supply doesn’t increase then in aggregate their money holdings cannot grow. Something should curb their demand for liquid cash holdings and so keep money demand equal to money supply, and that incredible is a higher nominal interest rate, a higher chance cost of holding money.

Money Demand Varies as Total Income Y Varies:

1465_money demand and total income.jpg

Legend: The elevated the level of total income, the elevated is the quantity of money demanded for any given interest rate and (for a fixed money stock) the higher will be the equilibrium interest rate.

If we draw another figure with the nominal interest rate i=r+π on the vertical axis and the level of total income Y on the horizontal axis. For every possible value of Y on the x-axis plot the point whose y-axis value is the equilibrium nominal interest rate as shown in figure. The consequence is the LM curve the economy’s current level of the real money stock Ms/P. The LM curve grade upward: at a higher level of real GDP Y, the equilibrium small interest rate is higher.

From Money Demand to the LM Curve:

1141_money demand to lm curve.jpg

Legend: The LM Curve on the right notifies us what the nominal interest rate will be for each value of national income Y.

The equation for the LM curve is merely the money demand function rewritten with the real GDP by itself on the left-hand side:

1457_lm curve and gdp.jpg

This equation notifies us that monetary policy changes that increase the nominal money supply shift the LM curve to the right: the similar equilibrium nominal interest rate i corresponds to a higher level of real GDP Y.  Financial policy changes that decrease the nominal money supply shift the LM curve in and to the left. Likewise a decline in the price level boosts the real money supply (M/P) and shifts the LM curve out to the right. A increase in the price level decreases the real money supply (M/P) and shifts the LM curve in to the left.

Latest technology based Macroeconomics Online Tutoring Assistance

Tutors, at the, take pledge to provide full satisfaction and assurance in Macroeconomics help via online tutoring. Students are getting 100% satisfaction by online tutors across the globe. Here you can get homework help for Macroeconomics, project ideas and tutorials. We provide email based Macroeconomics help. You can join us to ask queries 24x7 with live, experienced and qualified online tutors specialized in Macroeconomics. Through Online Tutoring, you would be able to complete your homework or assignments at your home. Tutors at the TutorsGlobe are committed to provide the best quality online tutoring assistance for Macroeconomics Homework help and assignment help services. They use their experience, as they have solved thousands of the Macroeconomics assignments, which may help you to solve your complex issues of Macroeconomics. TutorsGlobe assure for the best quality compliance to your homework. Compromise with quality is not in our dictionary. If we feel that we are not able to provide the homework help as per the deadline or given instruction by the student, we refund the money of the student without any delay.

2015 ©TutorsGlobe All rights reserved. TutorsGlobe Rated 4.8/5 based on 34139 reviews.