## What happens to LM curve when money supply increases?

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The increase in the money supply will shift the LM curve down and to the right. Output will remain at its original level, consumption will be lower, investment will be higher, and interest rates will be lower.

## Is LM increase in money supply?

The money supply does not change, so the LM curve does not change. Expansionary fiscal policy shifts the IS curve to the right (figure 3). The multiplier effect on consumption raises the national income and product.

**Is the LM curve the money market?**

The LM curve is plotted with the real interest rate on the vertical axis and real income (GDP) on the horizontal axis. Each point on the LM curve represents a money market equilibrium for a particular real interest rate and income pair (r, Y).

**What does LM model represent when money supply decreases?**

Variations in the real money supply shift the LM curve, as shown in Figure 16.23 “A Shift in the LM Curve”. If the money supply decreases, then the LM curve shifts in. This leads to a higher real interest rate and lower output as the LM curve shifts along the fixed IS curve.

### What does the LM curve represent?

LM (liquidity-money) curve The LM curve shows the combinations of interest rates and levels of real income for which the money market is in equilibrium. It shows where money demand equals money supply. For the LM curve, the independent variable is income and the dependent variable is the interest rate.

### Is-LM curve explained?

The IS curve depicts the set of all levels of interest rates and output (GDP) at which total investment (I) equals total saving (S). At lower interest rates, investment is higher, which translates into more total output (GDP), so the IS curve slopes downward and to the right.

**What makes the LM curve flatter?**

a. The LM-curve becomes flatter as money supply becomes interest sensitive. Any increase in income will lead to an increase in money demand, which will drive up the interest rate. But the higher interest rates will not only reduce the demand for money but also increase the supply of money.

**How LM curve is derived in money market?**

The LM curve can be derived from the Keynesian theory from its analysis of money market equilibrium. The greater the level of income, the greater the amount of money held for transactions motive and therefore higher the level of money demand curve.

## What is LM curve in economics?

The LM curve depicts the set of all levels of income (GDP) and interest rates at which money supply equals money (liquidity) demand.

## What is the difference between IS and LM curves?

On the IS-LM graph, “IS” represents one curve while “LM” represents another curve. IS-LM can be used to describe how changes in market preferences alter the equilibrium levels of gross domestic product (GDP) and market interest rates.

**How is LM curve derived from money market equilibrium?**

DERIVATION OF LM CURVE- LM curve can be derived from the Keynesian theory from its analysis of money market equilibrium. According to Keynes, demand for money to hold depends upon transactions motive and speculative motive. It is the money held for transactions motive which is a function of income.

**What is the LM curve in money theory?**

The LM Curve. The LM curve, named because it shows positions at which the demand for money (L for liquidity preference) equals money supply (M), completes the model. In the quantity theory of money we have already met a model of the market for money balances.

### How to derive the slope of the LM curve with interest-sensitive supply?

We can now derive the modified expression for the slope of the LM curve with an interest- sensitive money supply by using the equilibrium condition in the money market. The demand for money can be expressed as either

### What is the real money supply in LM diagram?

This is shown in LM diagram of Fig. 20.6. At the initial interest rate i 0, the real money supply is equal to M (i 0) in the southwest quadrant. If the interest rate rises to i 1, with the money supply fixed at M (i 0 ), the level of income must rise to Y 1 to maintain money market equilibrium.

**Is money supply interest sensitive on the LM-curve?**

Let us make an in-depth study of Money Supply on the LM-Curve. The interest sensitivity of the money supply can now be shown in terms of the IS-LM curve model.