The LM curve has a:
A)positive slope because a higher interest rate leads to a decrease in the demand for money and thus a higher level of domestic production is needed to cause people to continue to hold the same amount of money.
B)negative slope because a lower interest rate leads to an increase in the demand for bonds and thus a higher level of domestic production is needed to cause people to continue to hold the same amount of money.
C)negative slope because a lower interest rate leads to a decrease in foreign investments and thus a higher level of domestic production is needed for equilibrium.
D)positive slope because a higher interest rate leads to a higher incentive to hold money and thus a higher money supply is needed for equilibrium.

Question

Quizplus · Accepted Answer

The LM curve represents the relationship between the liquidity preference (demand for money) and money supply in the economy, holding all else constant. It has a positive slope because, at higher interest rates, the opportunity cost of holding money increases, leading to a decrease in the demand for money. To maintain equilibrium (people willing to hold the existing money supply), a higher level of income or output is necessary, which increases the demand for transactions and hence the demand for money. This relationship explains why the LM curve slopes upwards.

The LM Curve Has A