Question

An explanation for the slope of the LM curve is that as:

a. The interest rate increases, income becomes higher.
b. The interest rate increases, income becomes lower.
c. Income rises, money demand rises, and a higher interest rate is required.
d. Income rises, money demand rises, and a lower interest rate is required.

Answer 1

The correct answer is letter "C": Income rises, money demand rises, and a higher interest rate is required .

Step-by-step explanation:

The Liquidity Preference-Money Supply (LM) shows the relationship between real output and interest rates. According to this approach, the slope of the LM is positive when an increase in interest rates pushes the increase in income. The money supply and demand must be equal for that purpose which implies the demand for money will have to increase as well. Thus, for the LM curve to be positive the interest rates, income, and demand for money must be higher.