Is LM BP Model Explained?

Why does BP curve upward sloping?

As higher Y tends to produce a current account deficit, and higher r tends to produce a capital account surplus, the BP curve is upward sloping.

If international capital mobility is high, the BP curve is flatter than the LM curve..

When LM curve is vertical?

For any given level of real balances M/P, there is only one level of income at which the money market is in equilibrium. Thus, the LM curve is vertical. Fiscal policy now has no effect on output; it can affect only the interest rate.

Is curve a formula?

Algebraically, we have an equation for the LM curve: r = (1/L 2) [L 0 + L 1Y – M/P]. r = (1/L 2) [L 0 + L 1 m(e 0-e 1r) – M/P]. … This equation gives us the equilibrium level of the real interest rate given the level of autonomous spending, summarized by e 0, and the real stock of money, summarized by M/P.

Is LM model example?

The LM part of the model which stands for ‘liquidity-money’ represents the relationship between output and interest rate. IS-LM model applies to short-run because it assumes prices are sticky. It means that the IS-LM model assumes that prices, wages and money supply are given and do not change.

What is the BP curve?

A line on a chart indicating the series of interest rates at which a country’s balance of payments (that is, the amount of money entering a country less the money leaving it) is at equilibrium. It generally trends upward. It affects the exchange rates of currencies.

Is LM model in an open economy?

The IS-LM (Investment Savings-Liquidity preference Money supply) model focuses on the equilibrium of the market for goods and services, and the money market. Then, the LM curve, which represents the equilibrium in the money market. … Finally, we’ll analyse how the equilibrium is reached.

Is LM calculated?

To be precise it gives us the equilibrium interest rate for any given value of level of income (Y) and real money balances. In drawing LM curve, real money balances are assumed to be constant. … First, since in equation (7) for LM curve, the coefficient (k) of income (Y) is positive, LM curve will slope upward.

Is LM curve increase in taxes?

The increase in taxes shifts the IS curve. The LM curve does not shift, the economy moves along the LM curve. When taxes increase: Consumption goes down, leading to a decrease in output/income.

Is LM model with government sector?

In a three sector model, two new variables are included: government expenditure and taxation, G and T. The impact of taxes is felt through a change in the consumption level. … A change in the money supply disturbs the money–market equilibrium causing a shift in the LM curve.

Does LM reduce government spending?

Fiscal policy has no direct effect on the LM curve. Increased government spending or a tax cut is assumed to be financed by borrowing. The money supply does not change, so the LM curve does not change.

Is LM model explained?

The IS-LM model appears as a graph that shows the intersection of goods and the money market. The IS stands for Investment and Savings. The LM stands for Liquidity and Money. … The IS-LM model attempts to explain a way to keep the economy in balance through an equilibrium of money supply versus interest rates.

Is LM model open or closed?

When interest rates rise, investment falls and net exports fall, so output decreases by more in an open economy than it would in a closed economy. This means the IS relation will be flatter in an open economy than in a closed economy. The LM relation is unchanged in the open economy.

What does LM curve stand for?

liquidity-money(The name LM, meaning liquidity-money, is also traditional.) The LM curve gives the combinations of income and the interest rate for which the demand for money (or desired liquidity) equals the money supply and hence for which the domestic economy is in asset or stock equilibrium.

Is LM in closed economy?

LM curve: the market for money In a closed economy, the interest rate is determined by the equilibrium of supply and demand for money: M/P=L(i,Y) considering M the amount of money offered, Y real income and i real interest rate, being L the demand for money, which is function of i and Y.

What shifts the LM curve?

The LM curve, the equilibrium points in the market for money, shifts for two reasons: changes in money demand and changes in the money supply. If the money supply increases (decreases), ceteris paribus, the interest rate is lower (higher) at each level of Y, or in other words, the LM curve shifts right (left).