Answer to Question #107784 in Macroeconomics for Beatrice Coffie

Question

What condition is required for the LM curve to be vertical

Answer 1

LM curve represents the liquidity preference and money curve. Simplified, it explains the relationship between real output and interest rates. LM is a component of IS-LM model which means Investment Saving-Liquidity Preference Money supply.

For LM curve to be vertical, money demand depends only on income and not the interest rate. It means, even at varying interest rates, the money demand will remain constant.