why eventhough the r is denominator in LM formula, the slope of LM still goes upward

Posted by: admin 3 months, 1 week ago

(Comments)

Alright! Let me simplify this for you. We’re talking about the **LM curve**, which shows the relationship between **interest rates (r)** and **income (Y)**. Now, you’re asking why this curve **slopes upward**, even though **r** is in the denominator in the formula.

### Imagine this situation:
1. **You have money in your wallet**, which you use for two main reasons:
- To **buy things** (this depends on your income, how much you make).
- To **save or invest** in something like a bank account that earns interest (this depends on the interest rate).

2. **When your income (Y) goes up**, you need more money because you're buying more things. But there's only a certain amount of money in the economy (we'll call this the **money supply**).

3. Now, **interest rates (r)** affect how much money people want to hold in cash (in their wallets) versus how much they want to save or invest. **If interest rates go up, people want to save more money in the bank and hold less in cash**.

---

### The Core Question:
If **r** (interest rate) is in the denominator, that means as **r** goes up, money demand (L) should go **down**. So why does the LM curve still **go upward** (showing a positive relationship between r and income)?

### Simple Explanation:

Think of it like this:

- When **income (Y)** goes up, people need **more money** for their daily transactions. But the money supply is fixed (there’s only so much money to go around).

- To make sure everything stays balanced (because you can't magically print more money), **something else has to change** to reduce people's demand for money.

- The **interest rate (r)** is what changes! **As people’s income goes up**, and they need more money, the **interest rate has to go up too**. This **higher interest rate** encourages people to save more and hold less cash, **keeping the money market balanced**.

### Why Does the LM Curve Slope Upward?
When people’s **income increases**, they want more money. But since the money supply is fixed, **interest rates must rise** to reduce the amount of money people want to hold. That’s why, on the graph, as **income (Y)** goes up, **interest rates (r)** also go up. This gives the LM curve its upward slope.

---

### Visualize It:
Imagine a seesaw:
- On one side is **income (Y)**: as it goes up, people need more money for buying things.
- On the other side is **interest rate (r)**: as it goes up, people hold less money and save more.

For the seesaw to stay balanced (meaning the money market stays in equilibrium), **both Y and r need to go up together**, which creates the upward slope of the LM curve.

### Final Thought:
Even though **r** is in the denominator (which makes money demand decrease when **r** increases), the **overall relationship** between **income and interest rate** still leads to an upward-sloping LM curve because **higher income leads to higher interest rates** to keep the money market balanced.

• ← Who won the debate last night between Harris and Trump
• Writing or not writing →