The LM curve slopes upward because
A) as income rises, the demand for money begins to exceed its supply
B) as interest rates rise, the demand for money rises
C) as the price level rises, the velocity of money increases
D) as the money supply rises, the inflation rate increases
E) as the demand for money rises, the supply of money is increased

Question

Quizplus · Accepted Answer

The LM curve represents the relationship between liquidity (money supply and demand) and income in the context of interest rates. It slopes upward because, as income increases, the demand for transactions money (for spending) also increases, leading to a situation where the demand for money begins to exceed its supply at the current interest rate. This necessitates an increase in interest rates to equilibrate the money market, hence the upward slope.

The LM Curve Slopes Upward Because