Answer to Question #122227 in Macroeconomics for Joby George

Question

When is LM curve steeper and flatter? How does the factor k and h affect them?

Answer 1

LM curve is ussually flatter when the interest elasticity of demand for money is high and steep when the interest elasticity demand for money is low.

‘k’ and ‘h’ factors affect the steepness of the LM Curve.

Factor k shows the responsiveness of demand for money to the income level if k is large then the steeper the LM curve and the higher the responsiveness if demand for money to income level.

Factor h shows the responsiveness of demand for money to the interest rate. When his close to zero, then demand for money will be insensitive. Thus the LM curve will almost be vertical. When ‘h’ is small, the demand for money is not very sensitive; thus, the LM curve would assume a very steep shape. When ‘h’ is large, then the demand for money is very sensitive to the interest rate, and the LM curve will be close to the horizontal.