Question: Is LM A Function?

Is LM as AD?

The AD (aggregate demand) curve is defined by the IS–LM equilibrium income at different potential price levels.

The downward sloping AD curve is derived from the IS–LM model..

Is LM curve diagram?

The IS-LM graph consists of two curves, IS and LM. Gross domestic product (GDP), or (Y), is placed on the horizontal axis, increasing to the right. … The LM curve depicts the set of all levels of income (GDP) and interest rates at which money supply equals money (liquidity) demand.

Is LM a equation?

Note that both relationships are combinations of interest rates and output. Solving these two equations jointly determines the equilibrium. Algebraically, we have an equation for the LM curve: r = (1/L 2) [L 0 + L 1Y – M/P].

Is LM model explained?

The IS stands for Investment and Savings. The LM stands for Liquidity and Money. On the vertical axis of the graph, ‘r’ represents the interest rate on government bonds. The IS-LM model attempts to explain a way to keep the economy in balance through an equilibrium of money supply versus interest rates.


The downward slope of the IS curve represents the negative relationship between investment and interest rate. The higher the interest rate (vertical axis) the less investment (horizontal axis as investment is a part of output / Y).

What shifts the LM curve?

The LM curve, the equilibrium points in the market for money, shifts for two reasons: changes in money demand and changes in the money supply. If the money supply increases (decreases), ceteris paribus, the interest rate is lower (higher) at each level of Y, or in other words, the LM curve shifts right (left).

What does LM curve stand for?

liquidity-money(The name LM, meaning liquidity-money, is also traditional.) The LM curve gives the combinations of income and the interest rate for which the demand for money (or desired liquidity) equals the money supply and hence for which the domestic economy is in asset or stock equilibrium.

Is LM model open or closed?

When interest rates rise, investment falls and net exports fall, so output decreases by more in an open economy than it would in a closed economy. This means the IS relation will be flatter in an open economy than in a closed economy. The LM relation is unchanged in the open economy.

Is LM a liquidity trap?

Liquidity trap visualized in the context of the IS–LM model: A monetary expansion (the shift from LM to LM’) has no effect on equilibrium interest rates or output. However, fiscal expansion (the shift from IS to IS”) leads to a higher level of output (from Y* to Y”) with no change in interest rates.

IS and LM curve derivation?

Derivation of the LM Curve: The 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.

Is LM and aggregate demand?

The IS-LM model has the same horizontal axis as the aggregate demand curve, but a different vertical axis. … The LM curve describes equilibrium in the market for money. The LM curve is upward sloping because higher income results in higher demand for money, thus resulting in higher interest rates.