The LM curve slopes upward to the right because
A) the demand for money plus the demand for nonmoney assets must equal the supply of money plus the supply of nonmoney assets.
B) a higher real interest rate is associated with a higher level of the output gap in money market equilibrium.
C) a higher real interest rate is associated with a higher level of saving in goods market equilibrium.
D) in equilibrium the actual real interest rate must increase one-for-one with the expected real interest rate.

Question

Quizplus · Accepted Answer

The LM curve represents the relationship between the liquidity preference (demand for money) and the money supply in the economy, set against interest rates and output levels. It slopes upward because, at higher levels of income or output, the demand for money increases, leading to higher interest rates if the money supply is held constant. Thus, a higher real interest rate is associated with a higher level of output in money market equilibrium, as people demand more money for transactions at higher levels of economic activity.

The LM Curve Slopes Upward to the Right Because