Algebraic derivation of the LM curve
As mentioned before, equilibrium in the money market occurs
when
Md/P = Ms/P
Md/p = L (r, Y)
We can write an equation for the demand for real money balances,
which we shall represent by Md.
Md/P = Mdo + kY – hr
where: Mdo = autonomous money demand
k = elasticity of real money demand with respect to income
h = elasticity of real money demand with respect to interest
rates.
r = interest rate
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