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The LM schedule
Money and banking
Authorizer: Dr. Abdul Qadeer khan
Outline
• Money market
• Equilibrium interest rate
• Level of real income determination
• Goal
• LM schedule
• Formation
•...
Money market
Money market
• Is the segment of financial market in which highly liquid assets are
traded e.g. (P.I.B) Pakistan investmen...
Equilibrium interest rate &
Level of real income determination
Equilibrium interest rate
• Factors
Nominal supply of money
Level of price
Other factors that influence public demand f...
Goal
Goal
• To take the locus combination of Y & r
Equilibrium real interest rate ( r ) Equilibrium level of real income( Y )
H...
History and information of LM schedule
LM schedule
• 1937 john hicks derived the LM schedule.
• It is a Set of points which represents.
“All the combination of r...
Formation
Formation
• The model is presented as a graph of two intersecting
lines in the first quadrant.
Horizontal axis represents...
Formation
Interest rate
MD/P
Y
Real income
MS/P
re
0
r
Assumption
•Take real money supply constant (Ms/p).
And assume that it is fixed by the central
bank.
•If not then the locu...
Deriving the L-M Curve
Derivative of the LM schedule
• Previous chapter that : If real money supply falls then our demand
will shift towards left...
If real money supply increase(upward)
figure 4a
More elaboration ……….
Deriving the L-M Curve
• If we plot the equilibrium points on a separate graph then we will get
the LM schedule as it just...
Deriving the L-M Curve (figure 4b)
More elaboration ……….
More elaboration ……….
Determinants of the LM schedule
Determinants of the LM schedule
The slope of the L-M curve depends on
• the interest sensitivity/ elasticity of the specul...
Shifts in the LM schedule
Properties of LM Curve
• Upward sloping,
Y  L  i*  Increase/Decrease in the real money
supply shift the LM curve Righ...
• An increase in money
causes the LM curve
to shift down (right)
Shifts in LM Curve due to change in Money
Supply
Shifts in the LM schedule(right)
Shifts in the LM schedule(left)
Effects of Fiscal and Monetary Policy
Some important consideration
• Taxes affect the IS curve, not the LM curve.
• Monetary policy does not affect the IS curve...
Effects of Fiscal and Monetary Policy
Money and banking (lm schedule) by muhammad talha
Money and banking (lm schedule) by muhammad talha
Money and banking (lm schedule) by muhammad talha
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Money and banking (lm schedule) by muhammad talha

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LM schedule for Money and banking, SM schedule.

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Money and banking (lm schedule) by muhammad talha

  1. 1. The LM schedule Money and banking Authorizer: Dr. Abdul Qadeer khan
  2. 2. Outline • Money market • Equilibrium interest rate • Level of real income determination • Goal • LM schedule • Formation • Derivation of the LM schedule • Determinants of the LM schedule • Shifts in the LM schedule • Effects of Fiscal and Monetary Policy
  3. 3. Money market
  4. 4. Money market • Is the segment of financial market in which highly liquid assets are traded e.g. (P.I.B) Pakistan investment bonds, forex exchange rate and currency exchange. • LM deals with the money market where as IS schedule deals with goods market • Equilibrium of the money market requires equality between the supply and the demand for money. Ms = Md
  5. 5. Equilibrium interest rate & Level of real income determination
  6. 6. Equilibrium interest rate • Factors Nominal supply of money Level of price Other factors that influence public demand for real purchasing power Level of real income • Level of real income determination: Equilibrium level of real income is determined by the level of desired expenditures in the economy
  7. 7. Goal
  8. 8. Goal • To take the locus combination of Y & r Equilibrium real interest rate ( r ) Equilibrium level of real income( Y ) How simultaneously determined
  9. 9. History and information of LM schedule
  10. 10. LM schedule • 1937 john hicks derived the LM schedule. • It is a Set of points which represents. “All the combination of real income and interest rate for which the market is in equilibrium” • Before it was named as LL schedule but now LM as : holdings of money balance (liquidity) L= quantity of money balance supplied M
  11. 11. Formation
  12. 12. Formation • The model is presented as a graph of two intersecting lines in the first quadrant. Horizontal axis represents real income or real GDP (y) Vertical axis represents the real interest rate (r) . Point of intersection is called equilibrium point MD/P = MS/P. Take demand curve as real money demand MD/P Take supply curve as real money supply MS/P.
  13. 13. Formation Interest rate MD/P Y Real income MS/P re 0 r
  14. 14. Assumption •Take real money supply constant (Ms/p). And assume that it is fixed by the central bank. •If not then the locus combination will not be in same position
  15. 15. Deriving the L-M Curve
  16. 16. Derivative of the LM schedule • Previous chapter that : If real money supply falls then our demand will shift towards leftward • If real money supply increase then our demand curve will move towards rightward.
  17. 17. If real money supply increase(upward) figure 4a
  18. 18. More elaboration ……….
  19. 19. Deriving the L-M Curve • If we plot the equilibrium points on a separate graph then we will get the LM schedule as it justify the definition: “All the combination of real income and interest rate for which the market is in equilibrium”
  20. 20. Deriving the L-M Curve (figure 4b)
  21. 21. More elaboration ……….
  22. 22. More elaboration ……….
  23. 23. Determinants of the LM schedule
  24. 24. Determinants of the LM schedule The slope of the L-M curve depends on • the interest sensitivity/ elasticity of the speculative demand for money • the income elasticity of money demand
  25. 25. Shifts in the LM schedule
  26. 26. Properties of LM Curve • Upward sloping, Y  L  i*  Increase/Decrease in the real money supply shift the LM curve Rightward/Leftward. • The steepness or flatness of the LM curve describes the elasticity or responsiveness of money demand to the nominal interest rate. -- Steep LM curve: inelastic. -- Flat LM curve: elastic.
  27. 27. • An increase in money causes the LM curve to shift down (right) Shifts in LM Curve due to change in Money Supply
  28. 28. Shifts in the LM schedule(right)
  29. 29. Shifts in the LM schedule(left)
  30. 30. Effects of Fiscal and Monetary Policy
  31. 31. Some important consideration • Taxes affect the IS curve, not the LM curve. • Monetary policy does not affect the IS curve, only the LM curve. • For example, an increase in the money supply shifts the LM curve down. • Monetary contraction, refers to a decrease in the money supply (leftward shift) • An increase in the money supply is called monetary expansion(rightward shift)
  32. 32. Effects of Fiscal and Monetary Policy

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