LM Curve

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The LM curve identifies combinations of income and the interest rate for which the demand for money equals the money supply. As income, y, rises, the interest rate, i, must also rise in order to maintain equilibrium. The initials LM stand for "Liquidity preference/Money supply equilibrium".

It is generally used in conjunction with the IS Curve. The government can shift the LM Curve through monetary policy (increasing or decreasing the money supply), and the IS curve through fiscal policy (taxes and spending)

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