I am confused as to why the LM curve shifts as a result of a change in the money supply. I was trying to draw the diagram on p15 again just adjusting the MS. I can't visualise how the derivation would work.
Hi Leila - Tricky without a diagram! Suppose money supply increases. In the money supply/demand diagram, the MD curve stays put, and the MS line shifts right. That means the equilibrium point shifts down the MD curve, and so interest rates decrease. All that without any change to Y. So in the LM-curve diagram, for each fixed value of Y, the interest rate i increases - i.e. the LM-curve shifts upward. Hope that helps. Louisa
Thank you! I thought no one would ever reply! I understand now. Now I've got CT4 to worry about... Aghhh!!
