ASSIGNMENT

On

Wrong LM Curve

Course Title : Macro Economic Theory

Course Code : BUS-505

Slot : F2

Submitted To : Professor Dr. S. M. Ikhtiar Alam.

Professor, IBA-JU.

Submitted By

Name : Md. Shahed Monsur Rakib

ID : 201902036

E-mail : s.m.rakib09@gmail.com

Semester : 4th

Batch : 21st

Date of Submission: 26-12-2020

 Wrong LM Curve

̅
𝑴 ̅′
𝑴
𝒊
𝑷𝟎 𝑷𝟎

𝑷𝟎
𝑃0
𝑃0 𝑷𝟎
𝒊𝟏
𝒊𝟏
𝒊𝟐
𝒊𝟎
𝒊𝟎
𝒊𝒎

̅
𝑴 𝒀𝟎 𝒀𝟏 𝒀𝟎 𝒀𝟎 𝒀𝟏 𝒀𝟏
𝑷𝟎
Diagram: - 01

̅
𝑴
In this diagram, demand for money (𝑴𝑫 ) is curve. If money supply increases this curve will shift
𝑷𝟎
to right. From this we get the LM curve which is parallel. But this LM curve can be positive,
negative or zero. Because here, LM curve totally depends on Y (𝒀𝟎 &𝒀𝟏 ). If we change the position
of Y then we can see that LM curve changes its position and slope.

This is totally wrong. Because LM curve should be fixed. It cannot be changing its position (from
positive to negative) because of changing Y.

Ip & IY
IS Curve 𝑷𝒎
Curve LM Curve

d 𝒃
𝒊𝟏
𝟏 𝑴̅ 𝑷𝟎
c × 𝒂
𝒉 𝑷𝟏
𝒊𝟎

𝟏 𝑴̅
×
𝒉 𝑷𝟎

𝑷𝟏 = 𝒀𝟏 𝑷𝟎 = 𝒀𝟎 e 𝒀𝟏 𝒀𝟎

𝑷𝟎
AD Curve
𝑷𝟏 ̅
𝑨
𝟏 − 𝒄(𝟏 − 𝒕)

Diagram: - 02 𝒀𝟏 𝒀𝟎
In Diagram-02 we can see that, LM curve is positive. so, in the equilibrium P & Y are equal. If p
decrease LM curve will shift to the upward. Here, IP & IY curve couldn’t identify separately. “de”
line is the ip & iy curve both. The distance between 𝑷𝟎 & 𝑷𝟏 is the AD curve which is flipped (AD
curve should be downward from left to right & should be parallel with the IS curve).

So, because of the positive LM curve, there is no pyramid (As IP & IY both on the same line) & AD
curve is no more parallel with the IS curve and P&Y are equal. Which is totally wrong.
𝟏 𝑴̅
𝒊𝟎 − ×
𝒉 𝑷𝟎
Slope of LM curve (𝑷𝟎 ) =
𝒀𝟎

The characteristics of this slope is:

̅ increase then the slope will also decrease and become flat.
1. If 𝒀𝟎 & 𝑴
2. If 𝑷𝟎 increase then the LM curve will become steep in upward & LM will not parallel. But
we know that if 𝑷𝟎 decrease LM curve will shift to upward parallelly.

So, we can see that LM curve can’t be both positive, negative and zero. LM curve should always be
negative.

Right LM curve
𝑳𝑴𝟎

i
̅ ↑ 𝑳𝑴𝟏
𝟏 𝑴̅ 𝑴
×
𝒌 𝑷
0

̅′ Y
𝟏 𝑴
𝟏 𝑴̅ ×
− × 𝒌 𝑷
𝒉 𝑷

𝟏 𝑴̅′
− ×
𝒉 𝑷

𝟏 ̅
𝑴 𝟏 ̅
𝑴 𝟏 ̅
𝑴
So, in the diagram, If Y = 0, then ί = ꟷ( 𝒙 ), and when ί = 0, Y = 𝒙 . Here, ꟷ( 𝒙 ) is the
𝒉 𝑷 𝒌 𝑷 𝒉 𝑷
𝟏 ̅
𝑴
intercept of LM curve and 𝒙 is the point on Y axis. Now we will connect these two points to get
𝒌 𝑷
the LM curve (𝑳𝑴𝟎 ).
̅ increases (𝑴
If 𝑴 ̅ ↑), the LM curve will shift to right and vice versa. Government can change 𝑴
̅ to
shift LM curve upward or downward, given the price level.

This is the right LM Curve.