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Derivation of LM Curve

The document defines and derives the LM curve, which shows different combinations of interest rates and national income where money demand equals money supply. It does this using a four-panel diagram where: (1) money supply equals money demand, (2) money supply decreases with interest rate, (3) transactions demand increases with income, and (4) the LM curve combines these relationships. The LM curve can shift due to changes in money demand or supply, with leftward shifts occurring from higher money demand or lower money supply. Its slope can also change from alterations to the money demand or transactions demand curves.

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Sana Kiani
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579 views3 pages

Derivation of LM Curve

The document defines and derives the LM curve, which shows different combinations of interest rates and national income where money demand equals money supply. It does this using a four-panel diagram where: (1) money supply equals money demand, (2) money supply decreases with interest rate, (3) transactions demand increases with income, and (4) the LM curve combines these relationships. The LM curve can shift due to changes in money demand or supply, with leftward shifts occurring from higher money demand or lower money supply. Its slope can also change from alterations to the money demand or transactions demand curves.

Uploaded by

Sana Kiani
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Derivation of LM curve

Introduction:
According to keyens in monez market equilibrium takes place at the interest rate where MD=MS (Demand for money is equal to supply of money) with reference to this idea Hick presented this idea again in 1937 named LM curve . According to the philosophY of Hicks.

LM curve establish the relation between rate of interest and NI through LT and LS

Definition of LM:
LM CURVE IS A CURVE WHICH shows different combination of demand for money (MD) is exactly equal to supply of money (MS)

Derivation of LM curve : Explanation (derviation of LM curve) 1st diagram


Now with the help of diagram we will construct LM curve we have the 4th pannel diagram. 1. 1st pannel is showing that LS=LT. 2. 2nd pannel is showin that there is LS curve which have nagetive slope because LS=f(r) 3. 3rd pannel in diagram show that LT=f(y) 4. While in 4th pannel there is derivation of LM curve which shows the different combination of interest rate and national income where MS=MD

Explanation (Position shifting of LM curve w.r.t LT, LS curve)


Now with the help of diagram we will construct LM curve we have the 4th pannel diagram. 1. 1st pannel is showing that LS=LT. 2. 2nd pannel is showin that there is LS curve which have nagetive slope because LS=f(r) 3. 3rd pannel in diagram show that LT=f(y) 4. While in 4th pannel there is derivation of LM curve which shows the different combination of interest rate and national income where MS=MD A position shift in the LM curve can take place as a result of change either in the demand for or supply for money . let us 1st see the effect of a change in the demand for money on LM curve.

IN this diagram we can saw that there is Transcation demand for money and Speculation demand for money curve shift the LM curve left side. In pannel 1 the LS and LT curve shift downward that why LM curve shift leftward. At the same level of interest rate y responed is increase.

Explanation (Position shifting of LM curve w.r.t LS curve)

Now with the help of diagram we will construct LM curve we have the 4th pannel diagram. 1. 1st pannel is showing that LS=LT. 2. 2nd pannel is showin that there is LS curve which have nagetive slope because LS=f(r) 3. 3rd pannel in diagram show that LT=f(y) 4. While in 4th pannel there is derivation of LM curve which shows the different combination of interest rate and national income where MS=MD A position shift in the LM curve can take place as a result of change either in the demand for or supply for money . let us 1st see the effect of a change in the demand for money on LM curve IN this diagram we can saw that there is increase in Speculation demand for money curve shift the LM curve left side. In pannel 2 the LS curve shift downward that why LM curve shift leftward. At the same level of interest rate y responed is less as compare to LM1.

Explanation (Position shifting of LM curve w.r.t LT curve)


Now with the help of diagram we will construct LM curve we have the 4th pannel diagram. 1. 1st pannel is showing that LS=LT. 2. 2nd pannel is showin that there is LS curve which have nagetive slope because LS=f(r) 3. 3rd pannel in diagram show that LT=f(y) 4. While in 4th pannel there is derivation of LM curve which shows the different combination of interest rate and national income where MS=MD A position shift in the LM curve can take place as a result of change either in the demand for or supply for money . let us 1st see the effect of a change in the demand for money on LM curve IN this diagram we can saw that there is decrease in Transcation demand for money curve shift the LM curve right side. In pannel 3rd the LT curve shift downward that why LM curve shift right ward.

At the same level of interest rate y responed is less.

Explanation (slope shifting of LM curve w.r.t LT curve)


Now with the help of diagram we will construct LM curve we have the 4th pannel diagram. 1. 1st pannel is showing that LS=LT. 2. 2nd pannel is showin that there is LS curve which have nagetive slope because LS=f(r) 3. 3rd pannel in diagram show that LT=f(y) 4. While in 4th pannel there is derivation of LM curve which shows the different combination of interest rate and national income where MS=MD

IN Case of change in slope in LM curve1st we consider speculation curve with the change in speculation curve LM curve slope will change which means that when interest rate increse NI will decrease. In other word by changing the slope of LS curve the effect on LM curve .

Explanation (Slope shifting of LM curve w.r.t LT curve)

Now with the help of diagram we will construct LM curve we have the 4th pannel diagram. 1. 1st pannel is showing that LS=LT. 2. 2nd pannel is showin that there is LS curve which have nagetive slope because LS=f(r) 3. 3rd pannel in diagram show that LT=f(y) 4. While in 4th pannel there is derivation of LM curve which shows the different combination of interest rate and national income where MS=MD In case of change in slope of LM curve 1st we consider LT curve when the slope of LT curve change it leads a change im LM Curve whic shows that there is no change in interest but Y responed is increased.

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