When the LM curve is drawn, the quantity that is held fixed is:
A) the nominal money supply.
B) the real money supply.
C) government spending.
D) the tax rate.

Question

Quizplus · Accepted Answer

The LM curve shows the combinations of interest rates and income levels where the money market is in equilibrium, i.e. where the supply of real money balances equals the demand for real money balances. The real money supply is held fixed when drawing the LM curve, since changes in interest rates impact the demand for real money balances, which in turn affect income levels.

When the LM Curve Is Drawn, the Quantity That Is