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Discuss how the slope of the lm curve is affected by k and h

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Reference no: EM13321329

Consider the following money demand function (in real terms)

M/P=kY – bi where k is the income elasticity and h is the (nominal) interest rate elasticity of real money balances. Assume that k > 0 and that h > 0. Further assume  that the quantity of nominal money balances is fixed by the Bank of Canada at M and that the price level, P, is also fixed at P.

a. Derive the equation for the LM curve.

b. What is the slope of the LM curve?

c. Discuss how the slope of the LM curve is affected by k and h.

Reference no: EM13321329

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