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The money market equilibrium diagram. The LM curve shows the combinations of interest rates and levels of real income for which the money market is in equilibrium. It shows where money demand equals money supply. For the LM curve, the independent variable is income and the dependent variable is the interest rate.
In the IS-LM model, the domestic interest rate is a key component in keeping both the money market and the goods market in equilibrium. Under the Mundell–Fleming framework of a small economy facing perfect capital mobility, the domestic interest rate is fixed and equilibrium in both markets can only be maintained by adjustments of the nominal ...
The LM curve depicts the equilibrium in the money market and uses output as an exogenous variable, while the IS curve portrays equilibrium in the goods market using the interest rate as an exogenous variable. Output and interest rate are determined by the junction of the IS and LM. [13]
In the LM model of interest rate determination, [1]: pp. 261–7 the supply of and demand for money determine the interest rate contingent on the level of the money supply, so the money supply is an exogenous variable and the interest rate is an endogenous variable.
The IS curve joins all the pairs (Y,r) which satisfy the IS equation I(r)=S(Y) and the LM curve joins the pairs which satisfy the LM equation L(Y,r)=M. The point of intersection of the two curves tells us the income Ŷ and the rate of interest r̂. Under Keynes's Chapter 13 liquidity preference doctrine the LM curve will be
The equilibrium values Ŷ of total income and r̂ of interest rate are then given by the point of intersection of the two curves. If we follow Keynes's initial account under which liquidity preference depends only on the interest rate r, then the LM curve is horizontal. Joan Robinson commented that:
The lawsuit, filed on March 19 in U.S. District Court in Southern Florida, accused Stephanopoulos of making the statements with malice and a disregard for the truth. It said the statements were ...
The money market equilibrium is represented with the LM curve, a set of points representing the equilibrium in supply and demand for money. The intersection of the curves identifies an aggregate equilibrium in the economy [50] where there are unique equilibrium values for interest rates and economic output. [51]