LM curve

The LM curve is one half of the IS-LM model, a macroeconomic model that examines the relationship between a country’s GDP, economic output, and interest rates. In particular, the IS-LM model’s two curves represent two markets. While John Hicks is the official graphical creator of the LM (and IS) curve, it’s really just a graphical representation of what John Maynard Keynes wrote originally.

The LM curve stands for liquidity preference (the “L”) and the money supply (the “M”). On the graph, where the real interest rate (r) is on the y-axis and real GDP is on the y-axis, the LM curve is upward sloping.

The LM curve slopes upward because the more the economy is abuzz; people are willing to pay more to borrow money (i.e. pay higher interest rates). With the economic reality of supply and demand in the borrowing market, crossing with the constraints of the IS curve (investment-saving), we get an equilibrium GDP output and interest rate.

The LM curve is one half of a union that puts pretty much the entire macroeconomy on one graph. Keynes and Hicks were onto something in their free time. So, uh...what did you do on Saturday?