ECON 2000 Chapter Notes - Chapter 10: Liquidity Preference, Keynesian Cross, Money Supply
Document Summary
In summary, the lm curve shows the relationship between income and the interest rate that is consistent with the equilibrium in the market for real money balances (demand for real money balances and supply of real money balances) Thus, an increase in income leads to an increase in the interest rate (the quantity of income increases) A quantity-equation interpretation of the lm curve (not very important only another explanation) Y = c(y t) + i(r) + g is. This equation states that actual expenditure (income/output) = planned expenditure. This equation states that the supply of real money balances = the demand for real money balances (which depends on the interest rate and income) The model takes the fiscal policy, g and t, the monetary policy m and the price level p as exogenous (given) The is curve provides the combinations of r and y that satisfies the equation representing the goods market.