Assume That the Equilibrium in the Money Market May Be

Essay

Assume that the equilibrium in the money market may be described as M/P = 0.5Y - 100r, and M/P equals 800.
a. Write the LM curve two ways, expressing Y as a function of r and r as a function of Y. (Hint: Write the
LM curve only relating Y and r; substitute out M/P.)
b. What is the slope of the LM curve?
c. If r is 1 percent, what is Y along the LM curve? If r is 3 percent, what is Y along the LM curve? If r is 5 percent, what is Y along the LM curve?
d. If M/P increases, does the LM curve shift upward and to the left or downward and to the right?
e. If M increases and P is constant, does the LM curve shift upward and to the left or downward and to the right?
f. If P increases and M is constant, does the LM curve shift upward and to the left or downward and to the right?