What does a steep LM curve mean?

The larger the income-elasticity, and the lower the interest-elasticity of the demand for money, the steeper the LM curve will be. In that case, a small change in the interest rate is accompanied by a large change in the level of income to maintain money-market equilibrium.

Why is the LM curve steeper?

A steeper LM curve means that the demand for money is less interest elastic. The less interest elastic is the demand for money, the larger is the fall in interest rate when the money supply is increased.

What does a steep IS curve mean?

A steep learning curve is an expression that is often used in colloquial speech to describe the initial difficulty of learning something that is considered to be very challenging. If the curve was steep, as in the Blue graph, it would show that the learner is making rapid progression over a short period of time.

Is steep LM flat?

D. The LM curve is steep (slope is a large positive number) when money demand is insensitive to changes in interest rate (h is small). The LM curve is flat (slope is close to zero) when only a small change in the interest rate leads to a large change in money demand (h is large).

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 is K in LM curve?

The LM curve is a graphical representation of the equilibrium in the money market. ‘ Demand for money is defined by the equation L = kY – hi, where L is the demand for inflation-adjusted money; k is income sensitivity of demand; Y is income; h is interest sensitivity of demand; and i is the interest rate.

What factors shift the LM curve?

What is F in LM curve?

f. The LM curve gives the combinations of income and the interest rate at which the supply and demand for real balances are equal, so that the money market is in equilibrium. Suppose income Y increases by $1.

IS curve steep?

The IS curve is downward sloping. When the interest rate falls, investment demand increases, and this increase causes a multiplier effect on consumption, so national income and product rises. Flat or Steep? Hence the IS curve is flat.

Why is the IS curve steep?

The steepness of the curve depends on how sensitive investment spending is to changes in the interest rate, and also on the multiplier (K). On the opposite, if the investment spending is relatively insensitive to changes in the rate of interest, the IS curve is steep because of the lower value of the multiplier.

Is LM calculated?

Algebraically, we have an equation for the LM curve: r = (1/L 2) [L 0 + L 1Y – M/P]. This equation gives us the equilibrium level of the real interest rate given the level of autonomous spending, summarized by e 0, and the real stock of money, summarized by M/P.

Is-LM a diagram?

The IS-LM model appears as a graph that shows the intersection of goods and the money market. 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.

Which is true about the steepness of the LM curve?

The steepness or flatness of the LM curve depends on interest elasticity of demand for money. If the demand for money is interest inelastic the LM curve will be fairly steep. If it is fairly elastic, the LM curve will be relatively flat. The higher the value of c 1, the steeper the LM curve.

What does the LM curve tell us about money?

The LM curve tells what the various rates of interest will be (given the quantity of money and the family of demand curves for money) at different levels of income. But the money demand curve or what Keynes calls the liquidity preference curve alone rises.

How is monetary policy ineffective if the LM curve is horizontal?

If the LM curve is horizontal, monetary policy is completely ineffective because the demand for money is perfectly interest elastic. This is the case of “liquidity trap” shown in Figure 3, where the increase in the money supply has no effect on the interest rate OR and the income level OY.

How is the LM curve derived from Keynes?

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.