A curve used in Keynesian economics to represent the conditions for equilibrium in the money market. The LM curve shows those combinations of national income, Y, and the interest rate, r, at which the ex ante demand for money holdings, L, equals the ex ante supply of money balances, M. It is usually assumed that the demand for money balances rises when national income rises and falls when interest rates rise, while the supply of money is taken to be exogenous. Under these assumptions, when Y increases r must increase also, so that the LM curve slopes upwards when drawn on a diagram with Y on the horizontal axis and r on the vertical axis. See also IS-LM model.
|Reference: Oxford Press Dictonary of Economics, 5th edt.|