IS LM MODEL #Macroeconomics

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In this video on IS LM Model we will derive equation for LM curve. As we know LM curve is a curve that shows combinations of interest rates and levels of income at which money market is in equilibrium. This is the third video on IS LM Model .

In the IS LM model, We will derive LM curve in two steps. First, we show how money demand depends on interest rate and level of income. It is worth noting that in their demand for money people care more about the purchasing power of money, that is, people’s demand is for real money balances rather than nominal money balances. Real money balances are given by M/P where M stands for nominal money demand and p for price level.

Secondly , The demand for real money balances depends on the level of real income and interest rate. Demand for real money balances increases with the rise in level of income and decreases with rise in rate of interest.

This whole process has been shown in very simple language
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