The slope of an LM curve
A) gets steeper the more responsive the demand for money is to changes in GDP.
B) gets flatter the more responsive the demand for money is to changes in the interest rate.
C) is invariant, in the simple case at least, to small changes in the price level.
D) is invariant to policy shifts in the supply of money, unless the sensitivity of the demand for money to changes in GDP or interest rates is affected.
E) all of the above.

Question

Quizplus · Accepted Answer

The LM curve represents the relationship between the liquidity preference (demand for money) and the money supply in an economy, with respect to interest rates and GDP. The slope of the LM curve is influenced by how responsive the demand for money is to changes in GDP and interest rates. If the demand for money is more responsive to changes in GDP, the curve gets steeper (A). If the demand for money is more responsive to changes in the interest rate, the curve gets flatter (B). The slope of the LM curve is generally considered invariant to small changes in the price level (C) and to policy shifts in the supply of money, unless those shifts affect the sensitivity of the demand for money to changes in GDP or interest rates (D). Therefore, all of the statements A, B, C, and D correctly describe factors influencing the slope of the LM curve.

The Slope of an LM Curve