The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand.
A) greater; greater
B) greater; smaller
C) smaller; smaller
D) smaller; greater

Question

Quizplus · Accepted Answer

The LM curve is steeper the smaller the interest sensitivity of money demand (meaning people's demand for money is less responsive to changes in interest rates) and the greater the effect of income on money demand (meaning as income increases, the demand for money increases significantly). This combination makes the LM curve steeper because a small increase in income leads to a large increase in the demand for money, which requires a significant increase in interest rates to restore equilibrium in the money market.

The LM Curve Is Steeper the ______ the Interest Sensitivity