9. The derivation of the LM curve

Interacting with graphs to learn more about the derivation of the LM curve

The Liquidity/Money, LM, curve represents equilibrium in the money market. The “liquidity” part represents money demand; and the “money” represents money supply. Let's see how income and the interest rate are related to each other in the money market. Together with the IS curve (which you will learn about in another active graph), the LM curve is used to determine what will be the level of interest rate and income in an economy. To clearly understand how the position of the LM curve is affected by economic factors, you need to remember how the LM curve is derived.

Objectives

• Demonstrate how the LM curve is derived

• Understand the relationship between equilibrium in the money market and the LM curve

Click on the 'Exploration' link above to continue.