Explain about the lm curve, Macroeconomics

Assignment Help:

The LM curve 

The LM curve shows all combinations of R and Y, where the money market

is in equilibrium. The LM-curve slopes upwards.

Money market is in equilibrium when Md(Y, R) = Ms. We know how money market diagram will determine R when we know Y. In this case, question to consider is the following: What should happen to R when we change Y if we want the money market to remain in equilibrium?  

To answer this question, we try two different values for GDP Y1 = 100 and Y1 = 200. As the MDrely positively on Y, MD (Y1, R) will be smaller than MD (Y2, R). R should thus be larger when Y increases for the money market to be in equilibrium.

1264_Explain about the LM curve.png

Figure: Derivation of the LM-curve

The figure above explains this point. 

1. Start by selecting Y1 and Y2 in the left graph (Y1< Y2). 

2. Draw money demand for each of the different levels of GDP in the figure to the right the one corresponding to lower value of GDP should be the smallest. 

3. Identify the resulting interest rate in the figure to the right for both levels of GDP - the larger of interest rates corresponds to larger value of GDP. 

4. Extend these interest rates to diagram on the left. It will give you two points where money market is in equilibrium. 

5. Continue with other levels of GDP. The result would be a curve in the left diagram that we call LM-curve. 

LM curve will demonstrate you all combinations of Y and R where Md(Y, R) = Ms, which is, where money market is in equilibrium. Again, economy should be on the LM curve if money market is to be in equilibrium and money market alone can't determine which point will result in equilibrium in all markets.


Related Discussions:- Explain about the lm curve

Describe how exchange rate is expressed, Describe how exchange rate is expr...

Describe how exchange rate is expressed in some nation In some nations, exchange rate is expressed using home currency as base currency. In UK for instance, Danish exchange rat

Joint probability, Suppose P(X1)=.75 and P(Y2/X1)=.40. What is the joint pr...

Suppose P(X1)=.75 and P(Y2/X1)=.40. What is the joint probability of X1 and Y2?

Calculate the accounting breakeven point of a firm, Based on the recent su...

Based on the recent success of Ontario tennis star Milos Raonic, Nike Canadawill produce new state of the art tennis racket with a red maple leaf on the strings. Mike expects to se

Determine the exchange rate, Determine the exchange rate When a currenc...

Determine the exchange rate When a currency is freely floating, the central bank doesn't have to set monetary policy to alter the external value of the currency unless instruct

Positive and normative economics, POSITIVE AND NORMATIVE ECONOMICS E...

POSITIVE AND NORMATIVE ECONOMICS Economics as a social science adopts an analytical approach to the study of changes in economic variables on the actions of human beings. Th

Monetarism - friedman''s demand for money function, Monetarism This sc...

Monetarism This school argues that disturbances within the monetary sector are the principal causes of instability in the economy. According to monetarists, the money supply i

How big is buffer-caesar saladis, 1.  You are managing a breakfast and lunc...

1.  You are managing a breakfast and lunch only restaurant that sells all-inclusive plated meals (i.e. all lunches include any protein or hot foods as well as salads and sides on a

Explain short and long term interest rate in money demand, Explain about th...

Explain about the short term and long term interest rate in money demand. The Opportunity Cost of Holding Money Demand: a. Short-term interest rates Rates onto assets whi

Consumption , . (40 points) Consider two consumers, A and B. A and B both w...

. (40 points) Consider two consumers, A and B. A and B both want perfect consumption smoothing (c = cf) and both have no current wealth. However, the two consumers have different i

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd