The LM curve relates the level of income with the rate of interest which is determined by money-market equilibrium corresponding to different levels of demand for money. Welcome to EconomicsDiscussion.net! The lower the elasticity of liquidity preference for speculative motive with respect to the changes in the rate of interest, the steeper will be the LM curve. When money supply curve shifts outward, market interest rate falls and the LM curve shifts outward. In Fig. It is normally upward … The LM curve relates the level of income with the rate of interest which is determined by money-market equilibrium corresponding to different levels of demand for money. The LM curve tells what the … Money supply in an economy, on the other hand, is controlled by the central bank. It slopes upward because high output/GDP is associated with high interest rate due to high demand for money and vice versa. Let's connect. The theory of liquidity preference postulates that demand for money in an economy increases with increase in income and decreases with increase in interest rate and vice versa. The LM curve relates the level of income with the rate of interest which is determined by money-market equilibrium corresponding to different levels of demand for money. According to Keynes, demand for money to hold depends upon transactions motive and speculative motive. This extra demand for money would disturb the money market equilibrium and for the equilibrium to be restored the rate of interest will rise to the level where the given money supply curve intersects the new demand curve corresponding to the higher income level. From our analysis of the LM curve, we arrive at its following essential features: 1. On the contrary, the LM curve is steep if the interest elasticity demand for money is low. LM curve is a graph that plots equilibrium output dictated by the financial market at different interest levels. The LM curve slopes upward to the right. It represents the snapshot of the financial market i.e. The LM curve shifts to the right when the stock of money supply is increased and it shifts to the left if the stock of money supply is reduced. 5. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. The greater the extent to which demand for money for transactions motive increases with the increase in income, the greater the decline in the supply of money available for speculative motive and, given the demand for money for speculative motive, the higher the rise in the rate of interest and consequently the steeper the LM curve, r = f (M2, L2) where r is the rate of interest, M2 is the stock of money available for speculative motive and L2 is the money demand or liquidity preference function for speculative motive.

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