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Real Money, LM Curve

real money terms - as opposed to nominal money, which doesn't account for inflation  

  • M/P = real money supply
    • M/P = Y L(i)
    • increases as interest decreases
  • increase income (Y) >> increase real money demand
    • if supply stays constant, interest must increase to lower real money demand if income (Y) increases
  • slopes upward
  • difference curves for each M/P level
    • M/P increases >> need lower interest rate to make demand match >> shifts down
    • M/P decreases >> need higher interest rate >> shifts up

 

  • money market curves shift w/ different output
  • plots the equilibria points of money market by output Y instead of real money M/P
  • w/ substitution, changes in M/P causes shifts in LM curve
    • monetary policy >> changes money supply >> can shift LM curve
Subject: 
Economics
Subject X2: 
Economics

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