LM curve is the locus of all the combination points of income and interest rate levels needed to meet the equilibrium of money market. Given the money supply, the increase of income level increases the money demand, so it is necessary to restore the balance of the money market through the increase of interest rate and the decrease of money speculation demand, so the LM curve is positive slope.
The slope of LM curve mainly depends on the ratio of elasticity of money demand to income and interest rate. The smaller the elasticity of money demand relative to income, the greater the elasticity relative to interest rate, and the flatter the LM curve.
Extended data:
LM curve shows the trajectories of various combinations of income and interest rate when the money supply in the money market equals the money demand. The mathematical expression of LM curve is M/P=KY-HR, and its slope is positive.
LM curve is a curve described by different combinations of equilibrium income and equilibrium interest rate that make the money market in equilibrium. In other words, on the LM curve, each point represents the combination of income and interest rate, and these combination points just make the money market in an equilibrium state.
Its slope is positive, indicating that LM curve is generally a curve inclined to the upper right. Generally speaking, in the money market, the combination of income and interest rate on the right side of LM curve is an unbalanced combination of money demand greater than money supply.
The combination of income and interest rate on the left side of LM curve is an unbalanced combination in which money demand is less than money supply. Only the combination of income and interest rate on LM curve is the equilibrium combination of money demand equal to money supply.
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