The LM curve illustrates all combinations of domestic output levels and interest rates for which:
A)the domestic product market is in equilibrium.
B)the domestic money market is in equilibrium.
C)there is a zero balance for the country's official settlements balance.
D)there is full employment.

Question

Quizplus · Accepted Answer

The LM curve represents the equilibrium in the domestic money market, where the supply of money from the central bank (which is assumed to be fixed in the short run) intersects with the demand for money from households and firms. Therefore, option B is the correct answer. Option A is incorrect because the LM curve does not take into account the equilibrium in the product market. Option C is incorrect because the LM curve is not related to the country's official settlements balance. Option D is incorrect because the LM curve does not provide information about the level of employment.

The LM Curve Illustrates All Combinations of Domestic Output Levels