The LM curve describes the relationship between interest rates and GDP for which the supply of money is equal to the demand for real balances, holding _____ constant.
A) expectations
B) tastes and preferences
C) the quantity of money
D) expectations, tastes, and the quantity of money

Question

Quizplus · Accepted Answer

The LM curve is derived from the equation for the demand for real money balances, which is impacted solely by the quantity of money in circulation. Therefore, choice C, "the quantity of money," is the only factor held constant in the LM curve. Choices A and B, "expectations" and "tastes and preferences," respectively, are not taken into account in the construction of the LM curve. Furthermore, choice D, "expectations, tastes, and the quantity of money," is not applicable, as expectations and tastes are not considered in the equation for the demand for real money balances.

The LM Curve Describes the Relationship Between Interest Rates and GDP