GATE (Graduate Aptitude Test in Engineering) Economics (XH-C1) Macroeconomics-LM Model and Mundell Fleming Model Study Material (Page 2 of 2)

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LM Curve: Shift in LM Curve

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  • According to Keynes, the demand for money depends upon transaction motive and speculative motive. The money which is held for transaction purpose is a function of income.
  • The greater is the level of income, the greater will be the amount of money which is held for transaction motive and therefore, the level of money demand curve will be higher.
  • The money market is in equilibrium when the demand and supply of money are equal, denoting L for money demand and M for the supply of money.

LM Curve

Quantity of Money
  • The LM curve slopes upward to the right because when the level of income is higher, the demand for money is also higher and consequently the money market equilibrium that is the equality of given mon…

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Effectiveness of Monetary and Fiscal Policy

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  • The monetarists regard that the monetary policy is more effective than the fiscal policy for stabilization but on the other hand, Keynesians have an opposite view.
  • In between the two extremes there are synthesists who advocate the middle path.
  • The IS-LM model can be used for explaining the effectiveness of monetary and fiscal policy in relation to the Keynesian, monetarists and synthesists views.

Monetary Policy

  • It is explained where the LM curves LM1 and LM2 are shown with three IS curves. The LM2 curve emerges after an increase in the money supply.
  • let՚s first consider the change in range where the LM curve is perfectly elastic. This situation is also known as Keynesian liquidity trap situation in which the LM curve is hori…

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