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The LM Curve

幫考網(wǎng)校2020-08-07 11:26:26
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The LM curve is a graphical representation of the relationship between interest rates and the level of income or output in an economy. It is used in macroeconomics to analyze the impact of monetary policy on the economy.

The LM curve shows the combinations of interest rates and income levels where the money market is in equilibrium. The curve is upward-sloping, indicating that an increase in income causes an increase in the demand for money, which in turn increases the interest rate. Conversely, a decrease in income causes a decrease in the demand for money, which results in a lower interest rate.

The position of the LM curve is affected by changes in the money supply, which shift the curve to the right or left. When the money supply increases, the LM curve shifts to the right, indicating that at any given level of income, the interest rate is lower. Conversely, a decrease in the money supply shifts the LM curve to the left, indicating that at any given level of income, the interest rate is higher.

The intersection of the LM curve with the IS curve (which represents the relationship between interest rates and investment and consumption spending) determines the equilibrium level of income and interest rates in the economy. The LM curve is an essential tool for policymakers to analyze the impact of monetary policy on the economy and to set interest rate targets to achieve macroeconomic objectives such as price stability and full employment.
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