The LM curve slopes upward to the right because
A)the demand for money plus the demand for nonmoney assets must equal the supply of money plus the supply of nonmoney assets.
B)a higher real interest rate is associated with a higher level of output in money market equilibrium.
C)a higher real interest rate is associated with a higher level of saving in goods market equilibrium.
D)in equilibrium the actual real interest rate must increase one-for-one with expected real interest rate.

Question

Quizplus · Accepted Answer

The LM curve represents the equilibrium in the money market, where the demand for money equals the supply of money. As the real interest rate increases, individuals demand less money and more nonmoney assets, causing the demand for money to decrease. This will cause the LM curve to shift upward to the left. Therefore, the LM curve slopes upward to the right, indicating that a higher real interest rate is associated with a higher level of output in money market equilibrium. This is because a higher real interest rate reduces investment demand and increases money demand, resulting in a lower equilibrium level of income and output.

The LM Curve Slopes Upward to the Right Because