Since the velocity of money increases as interest rates rise the
A)LM curve is negatively sloped.
B)IS curve is negatively sloped.
C)LM curve is positively sloped.
D)IS curve is positively sloped.

Question

Quizplus · Accepted Answer

The LM curve is positively sloped because as interest rates rise, people and firms are incentivized to hold less money and put more of their funds into interest-earning assets. This leads to an increase in the velocity of money and a decrease in the demand for money. This relationship is captured by the LM equation, which shows that an increase in interest rates causes a decrease in the real money supply, leading to a higher equilibrium interest rate. Therefore, the LM curve is upward sloping.

Since the Velocity of Money Increases as Interest Rates Rise