Answer to Question #225708 in Macroeconomics for Sara

Question

3. Explain in words how and why the income and interest sensitivities of the demand for real
balances affect the slope of the LM curve.

Answer 1

Money demand and money supply are used to create the LM curve. The slope of the demand for money curve decreases as interest sensitivity for real balance increases. The slope is not extremely steep, indicating that a minor reduction in interest rates creates a huge increase in money demand.